Germany warned crumbing economy could be sucked into ‘zombification’ indefinitely

Christiane von Berg, economist for Northern Europe at the credit insurance company Coface, hailed Germany for batting off fears of a recession in 2019 but at the same time warned the EU member state was not out of the woods yet. She warned of the “zombification” of the German economy, meaning businesses in the country becoming lazy having spent years being propped up or kept going artificially. She said: “In the past few months there have been reports of job cuts and some bankruptcies in the German industry.

“This could lead to the assumption that bankruptcies in Germany would have increased significantly in 2019. But that’s not the case.”

According to Coface estimates, the number of bankruptcies this year will be three percent lower than those declared in 2018.

There has also been a 12-month decline in the amount of bankruptcies over the past 10 years.

Experts in Germany attribute the falling number of bankruptcies primarily to the zero interest rate policy of the European Central Bank (ECB).

If German banks continue to grant loans too liberally, businesses remain in a market that is completely unviable for the foreseeable future.

The German Institute for Economic Research (IW) admits monetary policy is an important factor in the decline of bankruptcies, adding interest rates are low and that access to credit in Europe is particularly easy for German companies.

It also identified better equity capital for companies was another factor.

Klaus-Heiner Röhl, economist at the IW, said: “Contrary to the criticism that has occasionally been expressed that the sustained economic upswing with extremely low interest rates would have produced zombie companies that are vulnerable in the event of an economic downturn, the average balance sheet quality of companies in Germany is obviously very solid.

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“The corporate sector mostly has a rock solid balance sheet quality.”

At the same time, the German economy should not feel too safe because of the 25-year low in bankruptcies, which could also be due to a decline in domestic competition.

He added: “The decline in the number of business start-ups could also have contributed to the weakening of insolvency.

“Industrial production in Germany has been falling steadily since the beginning of 2018.”

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Coface wanted companies in the wood, textile, clothing and chemical industries are particularly at risk.

It comes as Germany’s erratic economy has caused the euro to plunge into crisis.

Figures form IHS Markit showed the country’s purchasing managers’ index (PMI) fell to 43.4 in December from 44.1 the previous month, the first downward movement in three months.

The result was worse than the 44.5 reading predicted by economists in a survey by Reuters.

And the eurozone also saw a drop in the PMI, an index of prevailing direction of economic trends in manufacturing and services.

Additional reporting by Monika Pallenberg.

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