Numerous German companies expect business to decline in 2023. But how severe the impact of the pandemic and war will be is a matter of debate.
It is true that production figures in German industry rose in November compared with the previous month. Nevertheless, entrepreneurs are rather pessimistic about the new year: according to a survey, almost 40 percent of companies expect business to decline in 2023.
Is the German economy facing a significant recession in view of rising energy prices and disrupted supply chains? The verdict of economic experts is divided.
Companies expect business to slump
A dark picture is painted by a survey whose results have now been published by the employer-affiliated Institut der deutschen Wirtschaft (IW). In the November 2022 survey, 39 percent of companies said they expected business to decline in 2023. Accordingly, only just over a quarter (26 percent) expect production to be higher than in 2022, while a good third (35 percent) anticipate stagnation. The study involved 2,549 companies from industry, construction and services.
“The burdens of high energy costs and persistent material problems have thus already left a clear mark on business life and pulverized the confidence that initially existed for 2022,” said IW economic researcher Michael Grömling. Business expectations were “considerably worse” than the outlook a year ago.
“Germany is facing a recession”
Another trend: the regional differences that were still highlighted in the survey in the summer of 2022 receded – now, according to the IW, companies “in all parts of Germany” are pessimistic about their business prospects.
In Saxony and Thuringia, only 17 percent of companies expect a good year, while the best mood is in Bavaria. The uncertain energy supply is now affecting “all parts of the country equally,” IW expert Grömling explained. “Germany is facing a new recession.”
According to the IW, the situation is particularly dramatic in the construction industry, where a “serious recession” is expected. According to the survey, only 15 percent of companies there expect growth in 2023 – 54 percent expect a decline in their production. In the service sector and in the IT and media sectors, on the other hand, the assessments look more optimistic.
Slight increase in production
German industry increased its production in November by 0.2 percent compared to the previous month, as reported by the Federal Statistical Office on Monday. In October, production had still declined by 0.4 percent; economists had expected a somewhat more significant increase of 0.3 percent. Compared to the same month last year, production was down again.
Growth was recorded primarily in industry and energy production, while activity in construction declined – although there had been a significant increase in the sector in October. Production in the automotive industry increased noticeably, while mechanical engineering stagnated.
Based on these figures, the German Federal Ministry of Economics commented: “Industrial production stabilized in November after the weak start to the fourth quarter.” The mood among companies has brightened recently, it said. In the coming months, slowly fading materials bottlenecks could support the trend. “Nevertheless, the outlook for industrial activity in the first quarter remains subdued.” That was indicated by the recent weakness in new orders and the cooling global economy, it said.
“Supply chains are functioning better again”
Economists also express confidence. “The remarkable thing is actually that these figures are so unremarkable,” said economist Jens-Oliver Niklasch of Landesbank Baden-Württemberg about the production figures. A few months ago, there were fears that the industrial economy might buckle because of a looming gas shortage. The fact that this did not happen “shows the remarkable flexibility of industry, which has contributed to a considerable extent to reducing gas consumption”.
Thomas Gitzel, Chief Economist at VP Bank, also said, “Supply chains are functioning better again. Industry is able to work off the orders that have been stalled due to the shortage of materials.” The Corona pandemic and Russia’s war against Ukraine had long weighed heavily on international trade. However, the problems have diminished somewhat in recent months.