Q2 2023: Mid-Term Macroeconomic View on Germany and Switzerland. While Germany is recovering, we expect good times ahead for Switzerland
GDP: Recession is not happening
With the release of robust data for Q1 2023, there is growing optimism that Germany’s GDP may avoid a decline in 2023, thus averting a recession.
The global economic landscape, including issues with global supply chains, has improved significantly. However, despite this improvement, there remains a heightened level of uncertainty. Real income losses due to high inflation are expected to continue, which is likely to dampen investment spending and private consumption in the first half of the year.
As tighter monetary policies begin to take effect and a potential recession looms in the United States, anticipated to begin in the fourth quarter, any economic recovery later in the year is expected to be modest. Therefore, we tend to agree with forecasts for German GDP growth in 2023 to remain at 0%, although there have been increased upside risks since the beginning of the year.
In Chancellor Scholz’s government declaration on 27.02.2022, he argued that the shock caused by the Russian invasion of Ukraine marked a historic turning point, referred to as a “Zeitenwende” in German. This term holds strong positive connotations in Germany, as it is reminiscent of the reversal associated with German reunification in 1989/90. However, the current “Zeitenwende” is brought about by the actions of the country that had facilitated German reunification, and it signifies a significant shift. Russia’s attack has underscored that the socio-economic development with the prevalence of Western, liberal democracies has not reached a happy ending.
The implications of this historic turning point will play a crucial role in shaping social and economic developments particularly in the medium and long term. However, these implications are currently difficult to identify and understand, which may explain the cautious adjustments to policies and corporate strategies. These adjustments seem inconsistent with the intentions expressed in speeches and surveys, and this discrepancy has caught the attention of many observers.
Even for the more cyclical developments expected in the next 12 to 24 months, uncertainty looms large. Typically, during stable periods, cyclical fluctuations occur around a consistent trend, with uncertainty limited to minor variations in estimated trend growth. However, concerns now exist that the incline of the trend might become much shallower.
These uncertainties are impacting the behavior of market players, evident in more prudent spending and investment decisions, as well as the emergence of new priorities. Yet, these new priorities have not yet led to a pronounced reassessment of existing ones. The current “Zeitenwende” coincides with a series of other reversals in areas such as monetary policy, climate policy, transport policy, and gradually deteriorating demographic trends. Consequently, budgetary constraints are likely to become more pressing, as already indicated by the ongoing budgetary debates among various ministries in preparation for next year’s federal budget.
CPI Revisions: Lower Inflation Level Fails to Alleviate Concerns
The comprehensive overhaul of Germany’s Consumer Price Index (CPI) for 2023 resulted in a notable decrease in the inflation level. For 2023, we now anticipate an annual average of around 6%, while for 2024, our forecast stands at 2-2.5%. These adjustments primarily reflect technical factors rather than a shift in our overall perspective on inflation dynamics.
We still expect a substantial decline in the headline inflation rate throughout 2023, thanks to significant energy price base effects. However, despite the “disinflationary” influence stemming from energy, core inflation could remain persistently high during the first half of 2023 before gradually easing in the second half. We acknowledge the risk that robust wage outcomes and potential second-round effects may keep core inflation in the range of 5% or higher for an extended period.
Although the revised CPI indicates a lower inflation level, concerns persist regarding core inflation and its potential impact.
German Industry: Anticipating a Minor Setback in 2023, Automotive Sector Shows Signs of Recovery
It is expected that domestic production in Germany’s manufacturing industry will experience a slight decline of -0.5% in 2023 (compared to -0.4% in 2022). Considering the assumption of a moderate economic recovery in the Eurozone throughout 2023 and 2024, with the United States potentially facing a recession in the first half of 2024, domestic production in the German manufacturing sector could see a modest growth of 1% next year. However, this estimate would still place the output level 7% below the historical peak reached in 2018.
Once again, there is an expectation of a notable decrease in production within energy-intensive industries in 2023. The chemical industry might experience another double-digit decline (following a -11.6% decrease in 2022).
On a positive note, with the easing of supply problems for semiconductors and high demand backlog, the automotive industry could see a substantial 10% increase in domestic production. However, for other capital goods producers, we exercise caution. The mechanical industry’s production is projected to rise by 1% in 2023, while electrical engineering may experience a 3% increase due to a high order backlog.
In 2022, German producer prices for industrial products saw a significant average increase of over one-third. This marked the highest increase since the inception of the time series in 1949. However, starting in October 2022, producer prices began to decline on a monthly basis. With lower energy prices and a weaker order intake, this downward trend could persist for several more months. On average, producer prices may experience a slight decrease compared to the levels observed in 2022.
In contrast to energy-intensive industries, capital goods producers demonstrated stronger performance in 2022, despite facing supply shortages for intermediate goods. Electrical engineering witnessed a notable increase in domestic production, reaching 4.3%. This sector continues to benefit from heightened demand driven by structural trends like digitisation and investments in green technologies. Additionally, the accumulation of a high order backlog over the past years, resulting from ongoing disruptions in the supply chain, provided support. Mechanical engineering in Germany experienced a modest 0.6% rise in production in 2022. While the sector still maintains a substantial order backlog, new orders declined by 6% due to increased interest rates and economic uncertainty linked to the conflict in Ukraine.
The automotive industry in Germany reported its first output increase since 2017, with a growth of 3.1% in 2022. However, the production index remained 24% below the previous peak in 2017. Among all industrial sectors, the automotive industry faced significant challenges with supply shortages, particularly in semiconductors. Orders were canceled at the onset of the COVID-19 pandemic, and subsequent supply retrieval proved insufficient due to full capacity utilization in the semiconductor industry driven by higher demand from other sectors. These shortages, coupled with disruptions related to the conflict in Ukraine, weighed on German production in recent years. Although demand for new vehicles gradually recovered, the automotive industry continued to face supply chain issues. As of February 2023, the latest IFO survey revealed that 74% of automotive companies still reported shortages in intermediate goods, though this number has decreased from previous peaks.
Structurally, the shift towards electric mobility triggered reorganisation measures at various production sites in Germany, including suppliers, resulting in reduced available capacities. Furthermore, German automotive factories in the volume car segment encountered difficulties competing successfully with intragroup sites located in other countries. The 3.1% increase in domestic output in 2022 halted the previous downward trend, and a further recovery is expected in 2023 due to anticipated easing of supply chain disturbances.
The pharmaceutical industry witnessed the highest increase in production in Germany during 2022, with a growth rate of 5.1%. It has been the most dynamic industrial sector in terms of domestic output, with the production index surpassing 2015 levels by 23% (while total manufacturing experienced a decline of 3.3%). The increased prevalence of respiratory illnesses, including COVID-19, in Germany contributed to high demand for medications, leading to temporary shortages. Additionally, the pharmaceutical sector benefits from structural trends such as an aging society.
“For us at Winterberg, despite recent bank runs, Switzerland remains to be a smaller yet more stable and resilient market. That is also reflected in macro forecasts by the leading research institutions.” – Fabian Kröher commented on a topic.
The macroeconomic outlook for Germany and Switzerland presents notable differences in terms of real GDP growth and inflation projections. Switzerland is expected to outperform Germany in terms of economic growth, with forecasted real GDP growth of 0.6% in 2023 and 1.4% in 2024. In comparison, Germany’s real GDP growth is forecasted to remain stagnant at 0% in 2023 and show a modest increase of 1% in 2024. This suggests a more favorable growth trajectory for Switzerland, indicating a stronger economic performance in the coming years.
Regarding inflation, Switzerland is projected to experience lower inflation rates compared to Germany. In 2023, Switzerland’s inflation is forecasted at 2.4%, while Germany is expected to face higher inflation at 6.1%. Looking ahead to 2024, Switzerland’s inflation is expected to decrease to 1.5%, whereas Germany’s inflation is projected to decline to 2.3%. These figures indicate that Switzerland is expected to maintain a relatively stable and lower inflation environment compared to Germany, suggesting potentially better price stability and cost management in the Swiss economy.
Overall, based on these projections, Switzerland appears to have a more favorable macroeconomic outlook in terms of real GDP growth and inflation compared to Germany. Switzerland is expected to achieve positive economic growth, albeit modest, and maintain lower inflation rates. In contrast, Germany is facing the challenge of minimal economic growth in the near term and higher inflationary pressures. These contrasting outlooks highlight the differences in the economic dynamics and policy environments of the two countries.