Transformation in times of crisis

7 Jun 2023

The mobility transition requires investments from all stakeholders. At the same time, interest rates are rising and the economic environment is characterized by uncertainty. Nevertheless, or precisely because of this, now is a good time for Germany to upgrade its infrastructure, says Stefan Schilbe, Chief Economist at HSBC.

Corona crisis, Ukraine war, energy chaos. Does Germany, and above all the German citizen, need a break in terms of macroeconomic changes and thus also in terms of the transport turnaround? The opposition accuses the government of haphazard actionism and believes that Germans are now overwhelmed by all the transformative changes. On the other hand, it is precisely now a matter of strengthening the resilience of the location. This applies to supply chains just as much as to the omnipresent shortage of skilled workers.

Mr. Schilbe, what kind of situation are we in right now from an economic perspective?

First of all, it must be emphasized that we are coming out of a situation of extreme uncertainty from the fall of last year, caused above all by the effects of the war in Ukraine. The massive increases in energy prices made it more difficult for companies to calculate their costs and, via high inflation, caused households to suffer considerable losses in real income. And, accordingly, the omens were intermittently of course decidedly bad. 
Measured against the pessimistic expectations we had in the fall, things did not turn out so badly. You will remember that the ifo business climate and the GfK consumer climate had collapsed. And then, at the end of the day, the harsh economic reality turned out not to be quite so serious, even though, as expected, we fell into a technical recession after the latest reports. The fact that this economic downturn was only moderate, however, was due not only to intensive efforts to fill gas storage facilities to capacity, but also to the relatively warm winter, which helped to avoid a gas shortage. At the same time, prices on the energy markets have returned to pre-war levels, with stabilizing effects on consumer and business sentiment.  
Of course, this does not mean that all is well.

You mentioned that prices have stabilized. To what extent is political action contributing to this? Does economic policy actually have a certain amount of control over trading? 

In fact, the electricity and gas price brakes have noticeably cushioned the effects of the price increases on the market since the beginning of the year. And that helps both households and businesses. A good example is the chemical industry, which still had very sharp declines in production until December and has seen a recovery in the production process since January thanks to the gas price brake. Of course, the aid measures are also accompanied by economic costs, which we will see on the fiscal policy side. But the fact that prices on the wholesale markets have largely returned to normal means that these costs are lower than we might have feared in the fall.

"The mobility transition requires investment from all stakeholders. At the same time, interest rates are rising and the economic environment is characterized by uncertainty. Nevertheless, or precisely because of this, now is a good time for Germany to upgrade its infrastructure."

Talking about the inflation rate: At the moment it is still quite high by German standards, is that something you have to be prepared for in the long term?

First of all, we expect the trend inflation rate to fall. If you take the harmonized consumer price index, we have an expectation of 6.2% for Germany and 5.7% for the eurozone in 2023. Next year, these values will probably be noticeably lower, both in the order of 2.8%. According to the ECB's targets, this is not yet price stability, of course, but it is at least heading in the right direction.

However, it is important to bear in mind that base effects play a very significant role here. Due to the fact that in the course of 2023 energy prices are compared with the unusually high values of the previous year, the inflation rate will be arithmetically dampened.

In addition, we still have very high price pressure at the food price level at the moment. This is probably not over yet in the short term, because prices for unprocessed food are still rising, which are typically passed on to consumers with a certain time lag. But even there, the signs are that we're getting lower prices as a trend.

What we are seeing now, however, and this is something that will of course also cause the European Central Bank a bit of a headache, is noticeably higher wage increases as a result of the robust labor market. Just think, for example, of the collective wage agreement we have seen in the public sector, which means that inflation is likely to remain elevated, especially in the service sector, with corresponding consequences for the core inflation rate. A European Central Bank cannot ignore this.

That's why I'm suspicious of the expectations in the financial markets that one or two interest rate hikes will quickly be followed by further cuts. As a bank, we tend to be somewhat cautious in this respect.

Where do you expect an interest rate target? What can an economy tolerate without being stalled?

One thing to start with: We have, of course, already seen a great deal of interest rate increases. After all, we were at minus 0.5% just about a year ago. The deposit rate is now at 3.25%. However, we still have existing risks on the wage side due to the well utilized labor markets, and this could keep inflation higher than the ECB would actually like. Accordingly, we expect three more rate hikes of 25 basis points each in June, July and September. That would bring the deposit rate to 4.0%, and then the ECB will probably wait and see to what extent the monetary policy restrictions adopted in the past will take effect over time. According to the ECB's estimates, it will take up to five quarters for monetary policy to take full effect.

And a good indication of this is the ECB Lending Survey among financial institutions in the euro zone, which was published recently. According to this survey, banks are already reporting a decline in demand for loans from companies and households, simply because financing conditions have become more expensive. At the same time, financial institutions are becoming more reluctant to lend.

Isn't the current situation even more dramatic than usual because we have so many transformation issues?

First of all, it has to be said that the budget situation is not all that dramatic because we have relatively good tax revenues thanks to the high nominal economic growth rates. Of course, and this is now the challenge for policymakers, a changed interest rate environment also means that spending has to be prioritized, and this is much more unpleasant because you can no longer pour out the cornucopia to the same extent as was the case when interest rates were unusually low or even negative at times.

How do you see the European economic area as a whole from an investment point of view?

We have always been regarded as a very expensive place to invest, which is why so many investments, including in production, have been outsourced to Asia, for example. On the other hand, we saw this big reliability crisis last year.

Does that change the perspective of international companies on investing in Germany?

I do believe that the development we are seeing, especially in the area of energy prices, is something that raises questions about competitiveness, particularly for energy-intensive manufacturing companies. In addition to this energy price issue, we also have an increasing problem finding skilled workers. More than a third of companies in the manufacturing sector complain that they cannot find the employees they need to expand their production. Not least as a result of the shortage of skilled labor, unit labor costs have risen more sharply in Germany than in neighboring countries over the past 12 years - another locational disadvantage in relative terms.

To alleviate these problems, we need skilled immigration. To do this, of course, we also need to convince people why it is particularly interesting to come to Germany.

What can be done to ensure that an economy does not freeze in such a difficult situation, but instead seeks its salvation in innovation and transformation?

It is very important that we have reliability, for example in terms of electricity and gas supplies, and that this is also at a tolerable cost overall. I believe we have to invest heavily in the area of digitization, because everything that is now being discussed somewhere in the area of innovation also requires the corresponding framework conditions on the digital side.

That's costly, but typically you also get a return on these investments in the long term from an economic perspective. Other countries will do the same - an inexpensive and reliable energy supply and a well-developed infrastructure - including digital - are key location factors.

Does the same apply to everything that concerns sustainability technologies?

Basically, yes, of course. The crucial thing is that we remain innovative in this area, that we are able to convince other countries of the quality of our products, not least because as a country with relatively high production costs we can hardly compete on the price side.

Economics always has a bit of a hard time factoring the psychological level. How can motivation be maintained for such a difficult topic as the mobility transformation ?

That's a good question. At the end of the day, you have to take people along with you in the transformation in an environment where they are already hobbled at the moment by a massive loss of real income. The state cannot cushion all this financially with subsidies.

At the moment, there is a discernible sense of insecurity among households when large investments may have to be shouldered, when it is demanded that a house be renovated to make it more energy-efficient, when heat pumps are installed. Even if this can make sense in the long term, if one is able to produce cheap electricity CO2-free.

We are coming out of a protracted pandemic and are now, so to speak, just emerging from a severe energy crisis. We saw last year that people breathed a sigh of relief and initially consumed despite perhaps great challenges. Despite tight budgets, people went on vacation, visited restaurants and took part in leisure activities.

In such an environment, asking households to invest on a large scale is a major challenge.

Where is there a lack of willingness to invest in Germany and what is the reason?

There is no lack of willingness to finance. If I take institutional investors, for example, they would be willing to invest in public-private partnerships. And that can be very effective. If you have a private investor, a project typically goes very well and on time. So, especially at a time when government refinancing costs are rising sharply, you could try to implement such costly projects through targeted collaborations involving private financiers. Of course, this does not solve the problem of insufficient capacities in public construction.


Stefan Schilbe


As Chief Economist of HSBC Germany, Stefan Schilbe has been responsible for "Economic Research", the Bank's economics department dealing with economic, interest rate and foreign currency analyses, since 2001. In this function, he advises companies and institutional and private investors on capital investments and financing. Mr. Schilbe is a member of the "Committee for Economic and Monetary Policy" of the Association of German Banks (Chairman from 2012-2014), the "Chief Economist's Group" of the European Banking Federation EBF and a sought-after speaker at national and international conferences. In addition, he has many years of experience as an advisor in a medium-sized family office, is a member of various investment committees of special funds and is a lecturer at the Private Finance Institute of the European Business School (ebs) in Oestrich-Winke.