Economic crisis (1): We are all the losers!

Sometimes it is enlightening to let sober figures speak for themselves. For example, the Swiss economist Klaus Wellershoff writes in a commentary this week: "In the last twelve months, full-time equivalent employment has grown by 2.2%, but national income by only 0.5%. So our productivity has declined sharply." [1] In other words, Switzerland's economic growth has been below average for almost two years. The growth rate of real GDP has recently been 0.0 %, and especially in industry and manufacturing the value added has recently clearly declined with minus 2.9 %. This is having a negative impact on sentiment, which is as bad as it has been since the financial crisis.[2]

Europe's largest economy is on the ropes, and a number of countries are now clearly feeling the effects. Germany is in recession. The index for the entire private sector is at 44.7, according to the financial services provider S&P Global's monthly survey of about 800 companies (> 50 means an improvement over the previous month, note). Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, comments: "Stagflation is an ugly thing. But that is exactly what is happening in the services sector, which is starting to contract while prices have shot up again and are even picking up speed. If inflation can't be contained in the eurozone's largest economy, that's bad news for the ECB." [3]

Is the big unemployment looming?
The service sector is increasingly a major concern for economists. If that starts to weaken, millions of jobs are at stake. In the EU, more than two-thirds of employees work in this sector. The only exceptions are countries like Romania, with a traditionally high share of workers in agriculture; or the Czech Republic and Slovakia, with more than 35% in industry. Until now, there was hope that the service sector could dampen the recession. But this hope is just disappearing into thin air.

In traditional tourism countries like Switzerland, Austria or Croatia, the economic figures in the service sector are currently (still) being "glossed over" - by the renewed increase in demand coupled with a sharp rise in prices. In Switzerland, this leads to a strong increase in value added in the hospitality sector (+5.2%). Holidays in Austria are on average 15% more expensive this year, in Croatia (after the introduction of the euro at the beginning of the year) it is partly up to 50% more. But this is only a very short-term trend. Because the industry currently has to spend a lot of money for the provision of tourist services without making a reasonable profit. A large number of hotel businesses have found themselves in an economically strained situation, which is worsening due to rising labour, energy and financing costs.

If the demand for holidays declines - and we can safely bet on this - the next wave of bankruptcies will follow. This will have a devastating effect in popular holiday countries such as Spain, Italy or Austria, where the tourism industry's share of GDP is 8 to 9 %.

In plain language, this means that a wave of bankruptcies in tourism not only affects the industry itself, but also triggers a cascade of negative effects on supplier companies. Handicraft enterprises are affected just as much as agricultural production. Massive job losses follow, many in part-time employment.

Even less money for infrastructure?
Let's go back to the initial topic, let's go back to Germany: So there is a lack of growth, there is a lack of productivity. What is the German government doing? On the fringes of its closed meeting in Meseberg, it presented a "Growth Opportunities Act" - this is actually, at its core, a very detailed tax reform law. Sharp criticism is therefore already coming from the German Länder and municipalities, which feel they have been taken to the cleaners. Two-thirds of the tax savings are to come at their expense. The blockade in the Bundesrat is pre-programmed, so the draft goes back to square one.

Länder and municipalities have to make savings, in plain language this means: even less money for infrastructures, even more broken roads, poor broadband network, overloaded rail network, inefficient administration. Within the European Union, there are only two countries whose public investment in infrastructure is lower than Germany's in terms of GDP - Portugal and Ireland. Germany has been investing well over 1 percentage point of GDP less in its public infrastructure than the EU average for at least two decades. This gap cannot be explained by differences in wealth, debt brake, demographics or other factors.[4]

How Germany is supposed to be made more attractive as a business location can probably only be explained by Minister Robert Habeck.

The losers are already certain: it is you and me - all of us together. There is no difference whether we live in France, in Germany or in another EU state. We are talking about high costs of living with incomes that are falling in real terms at the same time. We talk about schools and kindergartens in need of renovation, about closed hospital wards, about non-functioning public transport. We are talking about rising interest rates that make it impossible for many to buy their own home.

Speaking of interest rates. There is one piece of good news after all. Because with all the bad news and negative outlook, there must be winners! There is always a winner!

This analysis was first published in: Le Courrier des Stratèges on September 8th, 2023

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