Macroscope | Why Germany’s economic issues run just as deep as China’s

Once again, Chinese policymakers have given investors reasons for hope. On September 24, the People’s Bank of China (PBOC) announced a raft of monetary easing measures to help counter a cyclical and structural downturn that has intensified in recent months. As Chinese stimulus packages go, this was one of the boldest since the eruption of the Covid-19 pandemic.

As is often the case with China, the immediate reaction in financial markets was positive, with volatile stock markets and commodity prices benefiting the most. Yet no sooner did the PBOC unveil the measures than analysts criticised the plan – which also provided support for the equity market and the property sector – for not doing enough to boost domestic demand.

Nomura, which has struck a more optimistic tone on China in recent months after having been relentlessly bearish, said, “we do not believe these monetary and financial policies alone are enough to arrest the worsening economic slowdown. We believe fiscal stimulus should take the front seat...”. However, Nomura cautioned that a poorly designed fiscal stimulus programme, even a large one, could have a negligible impact on growth.

Doubts over the efficacy of the policy response are part of broader concerns that Beijing is unable and unwilling to address the underlying causes of the downturn. Worries about China’s economic model, especially concerns about whether new growth drivers can offset the huge drag from property and related industries, are fanning fears about “Japanification” – a vicious feedback loop of weak demand, deflationary pressures and mounting debts.

Yet China is not the only large economy engulfed in pessimism because of deep-seated problems and the inadequacy of the policy response. Germany is in many ways in a worse position, having barely grown in the past five years. Its central bank warned last week that Europe’s largest economy might have slid back into recession, having been the only major economy to contract in 2023.

China and Germany face similar challenges. Both are on the sharp end of geopolitical fragmentation and deglobalisation. They also face severe demographic pressures and are suffering the consequences of policy mistakes. Furthermore, despite contending with weak household consumption, both governments are more concerned about fiscal profligacy and moral hazard than about growth.