TWO gleaming towers of glass rise above the wooded hills next to a Volkswagen factory in Wolfsburg, Germany. They are garages, as sleek as the vehicles they store. Automated lifts whizz cars about before sending them off to a cathedral-like hall to be collected by reverent buyers. But this delivery centre, where in normal times a new car would be handed over almost every minute, is almost deserted. Sparks may still fly on the assembly line and the two towers, each holding 400 cars, are stacked to the brim, but customers are hard to find.
VW’s lament is also Germany’s. A ferociously efficient manufacturing and exporting economy is grinding to a halt, as demand across the world melts away. Yet until quite recently the notion that Germany would be beset by the global downturn seemed unthinkable. For this was a country that has not only prudently managed its finances—both public and private—but is also one that has conducted painful economic reforms over the past decade. Both, it was thought, would leave it well placed to weather the global economic storm.
Two decades ago Germany’s unit labour costs, for instance, were some 12% above the euro-zone average, earning it the epithet of the “sick man of Europe”. Today, after a decade of wage restraint and labour-market reforms, they are some 13% below the average. And until recently, at any rate, German firms did not seem to be having as much trouble borrowing as their British, Italian or Spanish counterparts.
But in recent weeks a rash of new data has pointed to a sharp downturn in orders and exports that has shaken German complacency. Industrial production is falling more steeply than in America (see chart). The number of full-time employees getting government wage subsidies to compensate for working shorter hours has now surged to more than a quarter of a million, from just 16,000 a year ago. Enbw, Germany’s third-largest utility, reckons that, because of falling industrial demand, it is generating three terawatt-hours less electricity a month—which is the equivalent of removing a medium-sized city from the grid.
Germany is not alone in suffering a manufacturing slump. Japanese industrial production has sunk to a level not seen in two decades. And in Britain manufacturers are at their gloomiest since 1980. Yet there is much to suggest that Germany will fare worse than most in the slump and that its pain will be felt most acutely by its famed Mittelstand, the thousands of family-owned small and medium-sized firms that are the backbone of its economy.
Germany’s status as workshop of the world makes it uniquely vulnerable to the downturn. For six years it has been the world’s largest exporter. More than a fifth of economic output and a quarter of employment are based on exports, making it particularly vulnerable to a fall in global growth and trade. Deutsche Bank reckons that German exports will fall by about 8% this year, their steepest drop in 15 years or so. Mittelstand firms, which account for some 40% of all manufactured exports, seem especially vulnerable to the downturn. Many specialise in making complex and valuable equipment for factories, such as cigarette-rolling machines or printing presses. That has helped them dominate their niches, with global market shares of up to 90%. Yet these are also the products whose orders are the first to be cancelled when economies slow and companies trim investment. Demand for German machine-tools, for instance, slumped by 40% in December from a year earlier.
It does not help that Germany’s small and medium-sized manufacturing firms are finding themselves chronically short of capital. Equity provides less than 15% of small and midsized firms’ funding, compared with at least twice that in most other big economies. The Mittelstand’s reliance on loans from local banks has long been seen as a virtue. The bankers, it was said, would take a longer view and be more understanding of downturns than the fickle stock- or debt-markets sought out by firms elsewhere.
That does not seem true today. The Mittelstand’s trade association complains that even the friendliest savings banks are tightening their purse strings as a result of the Basel 2 accords on bank capital, which compel them to hold extra reserves against loans to small firms. Firms with so little equity have almost no ability to absorb temporary downturns or shocks, says Volker Beissenhirtz, an insolvency expert at Schultze & Braun, a German law firm.
Even amid the gloom, however, are some signs of hope. The benefits of some elements of Germany’s stimulus programme are already being felt. A rebate offered to buyers of new cars has led to a run on dealers. Carmakers that only weeks ago cut shifts and working hours are now thought to be considering recalling workers. And having already made painful reforms, Germany is well placed to benefit from a rebound in the world economy. “Germany lagged the rest of Europe coming out of the last recession,” says Jörg Krämer, chief economist at Commerzbank. “This time we’ll get the benefit of our past measures and there won’t be any talk of us being the sick man of Europe.”
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