German economy set to remain weak beyond short-term troubles
Poor economic data coming out of Germany suggests the country is likely to end the year in a technical recession. Ulrike Malmendier, a government advisor, told DW the problem runs deeper than a temporary weakness.
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00:00 It'll get worse before it gets better.
00:03 That's the assessment of Germany's economy by the panel of economic experts that advises
00:08 the government in Berlin.
00:09 In the latest forecast by the group, sometimes referred to as the wise men and women of German
00:14 economics, they are predicting the German economy will shrink by 0.4% this year as it
00:22 struggles to recover its strength before posting moderate growth of 0.7% in 2024.
00:33 The experts are also urging the German government to act now to avoid longer term problems.
00:38 To modernise the economy, the council suggests linking retirement age to life expectancy,
00:44 meaning that Germans would work longer to keep the pension system sustainable.
00:48 Among other suggestions are the experts saying that they want to make it easier for migrants
00:54 to enter Germany's job market.
00:55 They'd like to see more investment in education and they're also recommending changes in capital
01:00 market policies to make it easier for start-ups to get investment.
01:05 Well we can now speak to one of the members of the German Council of Economic Experts,
01:09 Ulrike Malmondier.
01:10 Thanks a lot for being with us.
01:11 So what's holding back the German economy right now?
01:18 It's really important to distinguish between the short term constraints and the longer
01:22 term constraints.
01:23 In the short term, we are still coming out of COVID, we are coming out of supply chain
01:27 issues after the energy crisis and we're still digesting all of that.
01:32 And that's why we are predicting for this year for sure negative growth, next year a
01:36 little more optimistic, positive, but you know, nothing humongous.
01:41 But to some extent, our annual report really puts the focus on the medium to long term
01:46 perspective.
01:48 And the fact that even there, things are not looking great, should be completely separated
01:53 from these energy prices, inflation kind of issues we are currently wrestling with.
01:58 We have to recognize that what's happening in Germany is that, A, because of demographics,
02:03 we don't have enough labor.
02:04 We need to increase the volume of hours worked.
02:07 That's the number one concern.
02:08 But also the thing we call total factor productivity in economics.
02:12 So basically, how much growth can you generate with the capital that is invested right now?
02:18 Where do the innovative great ideas come from?
02:21 Germany has been slowing down.
02:23 And then also capital stock in and of itself is aging.
02:27 So these are the three factors we hope people think about and not just the short term, what's
02:32 the next quarter type of questions.
02:34 Although when we are talking about, you know, what the next quarter is, why does it feel
02:38 as though Germany is finding it harder to recover from the pandemic and obviously the
02:42 energy shortage than its neighbors appear to be?
02:46 Yeah, that's an excellent question.
02:48 In particular, if you remember that at the beginning of Covid-19, Germany was actually
02:53 getting through it relatively well.
02:55 So trying to understand what happened then is a really interesting question.
02:59 Now, we do have to say that in some of the other European economies, you saw a bigger
03:04 crash in productivity, in GDP, because some of the industries were more affected.
03:10 Think about tourism or other service oriented industries, which were maybe less heavily
03:17 represented in Germany.
03:19 Now, these economies now benefit from the catching up, from getting back to prior levels,
03:24 while in Germany you don't see so much this upswing.
03:27 But at the same time, these medium to long term factors I really want to talk about,
03:32 they are kicking in right now.
03:34 We are seeing the constraints in the labor market.
03:37 Companies are feeling the need to get more, to increase the workforce and are not able
03:42 to do it.
03:43 At the same time, we do have to acknowledge that we did think consumers would pick up
03:50 faster, that consumption spending would go up faster.
03:53 We haven't seen that.
03:54 That's one of the things that was not directly predicted and that's feeding into these somewhat
03:59 lower numbers.
04:01 Okay, let's talk about these medium to long term effects that you've been mentioning and
04:05 about the German workforce, because we talk about it as a medium and long term effect,
04:08 but it's already here, this shortage of skilled workers here in Germany, for example.
04:13 So what are the solutions that you and your colleagues are putting forward?
04:17 Yeah, so you're exactly right.
04:21 It's already here.
04:22 But with the baby boomer generation entering retirement, it will get worse.
04:27 So we want to say really strongly, even if that's not happening today, that's what all
04:31 the politicians should be thinking about, the people who have influence on policy.
04:36 And so you can start by trying to address it with people who are already in Germany.
04:41 You can try to further increase labor market participation or even hours worked in particular
04:48 by females.
04:49 Females do have a higher participation quota now, but it's often still part time.
04:54 So getting women to go to full time would be one aspect, but it won't suffice.
05:01 We do need to drastically increase immigration of labor workforce and putting a lot of effort
05:10 into simplifying that, making it less bureaucratic, less complicated, making it less difficult
05:15 to get the acceptance of your degree abroad, that it's kind of equivalent to what we have
05:20 in Germany is the number one goal.
05:22 If I may add one thing, which is kind of outside of my expertise, this has to be coupled with
05:29 a culture of being welcoming to people, of trying to help them, of trying to invite them
05:34 to the country.
05:35 And Germany does not have the greatest tradition here.
05:38 When we say that we need gross 1.5 million people to immigrate into Germany to keep 400
05:46 K net to stay here, well, we could also work on fewer people leaving.
05:51 That would certainly also help.
05:52 And I think that's a margin we can work on as well.
05:55 Yeah, but these are all things that have been talked about for a while here in Germany,
05:57 that it's not welcoming enough to foreign workers and isn't doing enough to attract
06:01 them.
06:02 There's another thing that I want to pick on that's mentioned in the report as well
06:04 that's related to all of this, and it's a potential reforms to the pension age here
06:08 in Germany, basically trying to get people to work a bit longer when you throw in things
06:12 like immigration and making people work for longer.
06:16 These are controversial issues.
06:18 Has the German government got some tough decisions to make?
06:22 Indeed, and it doesn't help to postpone them any further.
06:26 Often there are concerns also about the political consequences, about political radicalisation
06:31 that may come out of such decisions.
06:34 The issue is, if we wait now, it will be even more problematic in the future.
06:38 So thinking about pension reform, we are at a stage now where just working on one margin,
06:43 for example, working for longer if you're healthier, won't suffice.
06:48 We have to work on different dimensions.
06:50 We have to get a funded capital market-based component.
06:53 We have to think about indexation, to keep real pensions constant.
06:59 There are different factors with which pensions are adjusted to account for changes in population.
07:05 It turns out we have to work with all of them.
07:08 While, you know, even within the council we have somewhat different views on what should
07:12 be done, exactly how, the big message here is it's really urgent now and we need to work
07:18 along all of the, use all of these channels.
07:21 Otherwise there's really little hope.
07:24 And your report says that not only is Germany facing an ageing population, but also an ageing
07:30 industrial base.
07:32 Is the point there that Germany's failing to move with the times?
07:39 Failing to move with the times.
07:40 So I think emphasizing the ageing is definitely correct.
07:43 I think The Economist has been talking about the sick men of Europe.
07:46 I'm not so sure about that.
07:48 But maybe the old men of Europe, both in terms of population and in terms of capital stock.
07:55 For the latter, companies need to have incentives to invest in Germany.
07:59 They need to know which direction are we going, where are investments worthwhile.
08:04 And to help that should be one of the key priorities for the government.
08:10 So this is all about encouraging innovation within Germany and encouraging startups.
08:16 How do you actually go about doing that?
08:19 Yeah, that is a really crucial topic.
08:23 If we want to get back to a higher growth path, we can't expect that those companies
08:28 and those industries which have been carrying Germany in the past, which have been the motor
08:32 of Germany in the past, are necessarily the ones that get us back to the higher growth
08:35 rate.
08:36 As you were saying, we need young, innovative companies, companies with certainly often
08:40 risky ideas, and not all of them will work out.
08:43 We need those to find an environment in Germany where they can not only start, but they can
08:47 also grow here and not all leave for Silicon Valley if they are successful.
08:52 Germany has had quite some improvement in terms of the early stage of this.
08:58 German government has been seed funding, has been collaborating on helping these companies
09:03 to get off the ground.
09:04 Where we had a hard time is the later stage, when these companies are becoming successful,
09:09 they need funding of 50 million, 100 million, 150 million to get the private companies,
09:16 to put private players to put money in, the big insurance companies, the pension funds,
09:20 maybe the family offices.
09:22 That needs to increase.
09:24 We have a recent success.
09:25 It was much celebrated that how Aleph Alpha got this big late stage funding.
09:30 We need much more of that.
09:33 A lot of the stuff we've talked about, as you said, is a present issue, or are present
09:38 issues.
09:39 Can you reassure Germans that this isn't all coming too late, these changes?
09:46 I certainly wish they had gotten started earlier.
09:49 You mentioned pensions.
09:51 Had we started earlier, some of these changes which are needed now would be hurting less.
09:58 But at this point, we have put a lot of effort in our annual report to really calculate through
10:04 the different policy measures, for example, thinking about pension reform.
10:08 And we think that this combo of capital-funded aspect, working with, like, retirement age
10:14 and these other two adjustment factors, indexation, et cetera, I mentioned, can really solve it
10:19 in a relatively smooth manner.
10:21 I also see really a change when I talk to people in the government of all three parties
10:27 involved in terms of understanding that we need young, innovative firms.
10:31 We need the growth to come out of there.
10:33 We need to focus on capital market-based investment, not just our traditional banking system.
10:39 So I do have some hope that we can turn it around.
10:42 Okay.
10:43 Ulrike Monmondier from the German Council of Economic Experts, thank you so much for
10:47 speaking to us and for bringing us your insights on this.
10:50 My pleasure.