On January 15, it was announced that the German economy contracted by 0.3 percent in 2023. Was it a surprise? Not really, but for Germany it was still bitter when the reality hit the headlines. The negative gross domestic product (GDP) result was the poorest among all comparable economies in the world.
The German economy is the biggest in the whole of Europe so it's actually quite important for investors and companies. Likewise, it is pretty important if the news is temporary or involves a more fundamental malaise.
Throughout 2023, all economic data from Germany confirmed the weak situation. But the unlucky GDP announcement happened precisely on the same day when the yearly World Economic Forum in Switzerland opened its doors to thousands of important people from around the world. The challenged German economy became an unofficial “talk of the forum.”
German Finance Minister Christian Lindner was scheduled to speak and he apparently felt it was needed to comment — the view that Germany is “Europe's sick man” resurfaced during the convention. This was countered by Lindner as he said Germany was “Europe's tired man” who just needed a strong cup of coffee to come back to strong growth mode. By that expression, he meant that reforms were needed, like increasing labor availability, lowering energy prices and digitizing the country.
It sounds easy and can be done within the next six months, though I assess the reality very differently. I argue that Germany suffers from a wide range of fundamental problems. It's positive that Germany's finance minister acknowledges there is a problem. But how does the minister and his government colleagues plan to save the battered economy?
The fast rhetoric from the podium in Switzerland was ideas about increasing the availability of labor in Germany. This is interesting as economic growth is negative but unemployment is at 5.8 percent, which is not particularly high. Three percent was the lowest when the labor market was very hot. It's actually hard to see the German economy growing at a strong pace because the country would soon experience a labor shortage. So it's not a bad idea to increase the availability of labor in Germany, but how?
To illustrate the magnitude of reforms that are required in Germany, I argue that the only true solution is to increase the work hours per week for all employees. It might be that Germany is hit by strikes right now but if such a proposal was presented, then the whole of Germany would be one big strike. This is the kind of reform that is needed after 15 years without new major legislation. But what else has the government proposed?
The finance minister would like to lower the tax burden for companies in Germany. This sounds like a good idea as the tax is around 30 percent, which is high compared to the average rate of 23 percent in all Organization for Economic Cooperation and Development countries. The only problem is that the fiscal budget in Germany doesn't have room for this kind of tax cut.
Another idea is to let a debt-funded government vehicle finance the tax cuts for the companies. In reality, this would not be a structural reform but the opposite; it avoids reform work where revenues are redistributed. This kind of discussion also underlines that in reality, the three-partner coalition government has extremely big fundamental differences in their respective views on the economy and how to run it.
In the meantime, other economies around the world are moving forward; some faster than others, but forward. I doubt the German government will come up with any big reforms as it is dysfunctional. Instead, the outlook for this year is zero GDP growth, and I can't see how it should change in 2025.
In an economy like Germany, there will always be investment opportunities, though in general, the biggest economy in Europe is fading out as an attractive investment destination. The factors I mentioned are known to all investors, but my view is that financial assets have not yet corrected lower.
Peter Lundgreen is the founding CEO of Lundgreen's Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Lundgreen is an international columnist and speaker on topics about the global financial markets.