Economics Update February 2025 - Groundhog Day just in time for the election

February 2 is Groundhog Day every year in Punxsutawney, Pennsylvania. Whether or not the cute rodent Phil sees his shadow after hibernation determines whether winter lingers or spring finally arrives. A spring upturn, or at least a silver lining of hope on the horizon - most companies in Germany could hardly be expecting anything more eagerly.

In economic terms, however, such an upturn does not happen by itself - at least not if the economy is stuck in a deep structural crisis. And this is the case in Germany, as (almost) everyone should have realized by now. Analysts who monitor economic events have been experiencing their very own groundhog days for years. In December 2023 (sic), we wrote: “Only a marginal increase in economic output is expected for 2024. Germany is therefore at risk of falling into a disastrous cycle: The economic slump, which will then have lasted for 5 years, will exacerbate existing distribution conflicts and slow down the possibilities for financially cushioning necessary structural adjustments, and this in turn will further slow down economic momentum. It remains to be hoped that the traffic light government will still find the strength to cut through this knot by systematically improving the general framework conditions.”

We now know that the traffic light government no longer had this power and consequently collapsed as a result. Otherwise, it would suffice to replace the year 2024 with 2025 in the above text. It might also need to be adjusted to reflect the fact that we are likely to have reached the disastrous cycle that was looming at the time. It is therefore all the more urgent that the new federal government, in whatever composition, finally gives priority to structural economic reforms and, above all, is able to implement them.

A few figures illustrate the dramatic nature of the situation: since the end of 2019, the US economy has grown by around 12% in real terms, i.e. excluding inflationary effects, while growth in the eurozone was a meagre 4%. And in Germany: zero. With US growth momentum, our economic output would be around 100 billion euros higher in real terms every quarter than is actually the case. If we had at least reached the European average, it would still be around 38 billion euros - per quarter, mind you. With a government share of just under 50 percent, it is immediately clear that many of the distribution discussions associated with the national budget would be much easier to conduct and some would not even be necessary.

The list of necessary actions has been described many times - it ranges from tax relief for citizens and companies to limiting the omnipresent bureaucracy, securing the long-term solidity of social security systems, greater investment in education and digital infrastructure through to an attitude that does not first perceive the risks in new things, but above all the opportunities. The latter includes a challenge not only to politicians, but above all to each individual in their respective professional environment.

Groundhog Day is three weeks before a landmark federal election. This may be an incentive not to let Germany's economic history unfold like the life of Phil Connors, who is trapped in a time warp in the relevant movie “Groundhog Day”. After all, the consequences for prosperity in Germany would be devastating in a rapidly changing world.