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24.09.2019

THE "R-WORD" HANGS ABOVE THE GLOBAL ECONOMY

Many industrialized and emerging countries are experiencing an economic downturn. It remains to be seen whether this will turn into a global recession. But the burden companies have to bear is increasing - also because politics has become so unpredictable.

By Holger Paul

The "R-word" hovers like a dark cloud over the global economy in autumn 2019. Are industrial nations and emerging markets now sliding into recession by the dozen or are they experiencing just a temporary dip? The alarm bells are still ringing cautiously at best - but they are audible. The danger of a recession in the euro zone remains low, ECB President Mario Draghi said after the September Council meeting - but it is rising. And that's why the central bank opened its floodgates once again - even though they were already wide open - in order to stabilize the economy in the euro zone and, such is the hope, to give it a little boost. However, this "alarm measure" did not go unchallenged. Klaas Knot, President of the National Bank of the Netherlands, loudly criticised the ECB's latest package of measures as disproportionate to current economic conditions. There is no danger of deflation, nor are there any signs of recession, he claimed. And Bundesbank President Jens Weidmann seconded that the economy in Germany and the euro zone had cooled down, but that the Governing Council had "overstepped the mark".

The question of whether a recession is imminent or not divides the experts. This makes it all the more difficult for companies to gain a clear picture of what they will have to expect in the coming months. The only thing that is clear is that the current combination of stress factors is enormous. It would be nothing special if business in general was to cool down again after years of moderate growth. Companies can deal with this. The fact that structural change is taking place in the industry itself on a broad front at the same time is already rarer. Digitalisation is a challenge for companies, as are the changes in the enormously important car industry. The fact that the third - and completely unpredictable - factor is a full-blown trade dispute between the two largest economic powers, the USA and China, the consequences of which can also be felt in the distant hinterland in view of global supply chains, then is unique. The fact that the outcome of the Brexit is still unclear almost fades under these circumstances - but makes the situation even more difficult for many companies. "Around 70 percent of companies with more than 500 employees see their exports threatened by increased protectionism, almost a third even see high risks," says Jürgen Matthes, economist at the Institut der Deutschen Wirtschaft in Cologne. "This downturn was triggered by a series of global political events that called into question a global economic order that had grown over decades," adds Dr. Timo Wollmershäuser, Deputy Head of the ifo Center for Macroeconomics in Munich.

This accumulation of burdens is not good for the mechanical enigneering industry. As an industry that thrives on exports, mechanical and plant engineering is among the first to feel the effects of global trade disputes, explains Dr. Ralph Wiechers, Chief Economist of the VDMA. If problems on individual, national markets are added - from a general weak growth in Germany to political upheavals in Turkey to sanctions against Russia - then investments and orders are postponed or even stopped. "And even if the trade dispute between the USA and China does not escalate any further, we must assume that the escalation of punitive tariffs will not be turned back again so soon - with corresponding consequences for world trade," says Wiechers. "The real problem with Donald Trump's trade disputes is not the tariffs themselves, but the great uncertainty about what is to come. Because uncertainty is poison for investment decisions," affirms Gabriel Felbermayr, President of the Kiel Institute for the World Economy.

So it is no wonder that the signs of the forecasts are all pointing downwards at the moment. A "technical" recession is currently expected in Germany, as growth is expected to decline for two consecutive quarters. However, the decline is only slight, which is why the alarm bells are only rung quietly. "Many emerging countries around the world still have a lot of catching up to do. This offers great export opportunities for German machine builders and car manufacturers. There is therefore no reason to question the export orientation of the German economy," says Felbermayr. But the devleopment could be completely different, "because in the eyes of many, the trade conflict is ultimately an expression of massive geopolitical competition between the USA and China," warns VDMA chief economist Wiechers. If this escalates, there is a danger that the entire global economy will slide into recession. The VDMA economists do not currently see this scenario as the basis for planning, but believe that the global economy will continue to weaken and that political uncertainties will persist. And that is why the forecast for 2020 for mechanical engineering and plant construction in Germany is also quite sober: a fall in production of 2 percent in real terms, compared to this year’s figures.

Further Information

VDMA Department of Economics and Statistics

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Contact
Olaf Wortmann, VDMA Department of Economics and Statistics.