For the third year in a row, this author is having an incredibly hard time peering into his crystal ball for the coming year. In late 2020, he was sure Germany's economy would "step it up a gear" in 2021. One year later, prospects hadn't gotten any rosier: The 2022 outlook was dreary, with just a sliver of hope.

Now, it is time to look to 2023. One might be tempted to simply quote Germany's economy minister: "It's going to be difficult," Robert Habeck has said in various interviews. We could either take that at face value, or we could take a closer look. Let's begin with the good news: The end of the world has been called off for now, Germany's economy has weathered the COVID shock as well the consequences of Russia's war on Ukraine surprisingly well — that includes the energy shock that ensued after deliveries from Siberian gas fields were halted.

So far, the winter has been relatively mild, gas reservoirs are filled to the brim, businesses have full order logs, delivery bottlenecks are few and far between, prices for container freight are dropping and massive federal subsidies have noticeably relaxed the economic crisis scenarios once feared.

No more coal

A recession in the coming months is still likely but it is expected to be comparatively mild. The starting point isn't all that bad considering this year's third quarter saw economic growth of 0.4%, despite inflation being in the double digits.

It seems to be a unique feature of these concurrent crises (the coronavirus pandemic, the war in Ukraine) that so-called domestic consumption, or peoples' buying power and desire to travel, has fed this growth. Amid the pandemic, Germans amassed some €200 billion ($213 billion), which they are now spending — perhaps guided by the conviction that things aren't going to get better and that it is better to spend that money sooner rather than later.

Fairly lavish trade agreements (the metal industry, for example, agreed on an 8.5% wage increase and a one-off, tax-free payment of €3,000; the chemical industry agreed upon 6.5%; and dockworkers on the North Sea coast are receiving a 9.5% increase) are sure to have assuaged workers' fears of not being able to afford the rising costs of gas and electricity. The federal government's €200 billion relief package — Scholz's famous "double whammy" — has surely also eased fiscal worries.

Some had prophesied much darker times. Habeck, for example, spoke of mass poverty and misery, while the head of the chemical company BASF feared the most severe crisis since World War II. Neither seem to have been right, instead, we have witnessed just how flexible the market economy is able to respond to shocks. Not only has the economy proven resilient (see the third-quarter growth mentioned above), but BASF is expecting a sales increase of 15%, along with €7 billion in profit before special factors.

Massive debt

Nevertheless, one would be mistaken to believe that all is well. The high utility bills aren't due until 2023, and that's just the tip of the iceberg. Financial market professionals — the real pros, not the run-of-the-mill crash gurus looking to sell another book — are truly worried about another system-wide failure.

We're not facing one isolated risk, as the head a major international bank in Germany told business newspaper Handelsblatt. Instead, he said, we're facing a combination of many different risks, the likes of which he had "never experienced before."

The main concern is that sovereign debt has continued to rise in many states. According to the Institute of International Finance, global debt reached $305 trillion (€290 trillion), this summer. For comparison: Germany's federal budget for 2023 is €476 billion. China is another shaky candidate when considering further developments.

While the Communist leadership finally brought itself to correct mistakes it had made during the pandemic, the domestic market has still been deeply impacted, and global demand for products "made in China" has dropped severely. This is particularly worrisome considering Germany's heavy dependence upon China's market — despite all attempts to diversify partnerships. 

Europe is the solution

These gloomy prospects look even worse when considering Germany's glaring lack of skilled labor. As the population continues to age, only a targeted immigration policy will be able to make up for the 500,000 skilled workers the country needs. We can only hope that the bill introduced by the current government doesn't flop the way the previous government's proposal did in 2020.

If that's not enough to worry you, consider globalization and the way it is sputtering to a halt. Germany had a lot to gain as global interconnection reduced poverty and spread prosperity.

But as soon as Germany ran out of face masks amid the pandemic and Russia's warlord decided to stop delivering gas, it learned that globalization also comes with vulnerabilities and dependencies. In the short-term, this does not look likely to change. This makes it all the more crucial that we rely on bilateral trade agreements, and on the domestic market. For Germany, that means relying on Europe.

This piece was originally published in German.