Germany, how are you doing? From pandemic to trade war – this is the state of the economy

In May 2020, after a historic seven-week lockdown, economists and politicians were asking themselves the same question: how long will it take the economy to recover from a disruption like the coronavirus pandemic?

In order to make an informed assessment, Creditsafe analyzed data from similar stress scenarios in Western economic zones. This included analyzing information on the severe Swedish banking crisis in the early 1990s, the dotcom bubble and the global financial crisis of 2008. Overall, the risk experts at the credit agency predicted an increase in insolvent companies of well over 50% in May 2020 – without additional effects – and an economic normalization to pre-corona levels by 2023 at the earliest.

Doch die Rückkehr zur vermeintlichen Normalität verlief anders: Die Pandemie zog sich länger als erwartet, Lieferketten erwiesen sich als anfällig und wurden durch den Krieg in der Ukraine zusätzlich unter Druck gesetzt. Die Energiewende, Handelsembargos und Wirtschaftstransformationen erschwerten die Lage zusätzlich. Eigentlich sollte ein exportorientiertes Deutschland aufgrund der gewachsenen Komplexität der globalen Wirtschaft und der Zunahme geopolitischer Risiken nun deutlich reagieren. Stattdessen sehen wir seit 2020 stark rückläufige Insolvenzzahlen. Während sich die Zahl der Geschäftsaufgaben mit Beginn der Pandemie jährlich signifikant erhöhte, sank die Insolvenzquote mit jedem Jahr deutlich. Trotz eines Anstiegs in  2023 blieben über 60 Prozent der erwarteten Insolvenzen eines harmonisierten Durchschnittsjahres aus.

However, the return to supposed normality took a different course: the pandemic dragged on longer than expected, supply chains proved to be vulnerable and were put under additional pressure by the war in Ukraine. The energy transition, trade embargoes and economic transformations made the situation even more difficult. Given the growing complexity of the global economy and the increase in geopolitical risks, an export-oriented Germany should now be responding significantly. Instead, we have seen a sharp decline in insolvency figures since 2020. While the number of business closures increased significantly each year from the start of the pandemic, the insolvency rate has fallen significantly with each year. Despite an increase in 2023, over 60% of the expected insolvencies in a harmonized average year did not occur.

The repeated suspension of the obligation to file for insolvency in the first year of the pandemic and the “Wumms” and “Doppelwumms” government aid measures played a role. Far fewer companies than expected filed for insolvency.

At first glance, it seems contradictory, but insolvencies, like business closures, are to a certain extent a necessary part of a functional economy. They strengthen healthy, sustainable companies, while inefficient business models disappear. In this way, they free up resources for the market and support the transformation of the economy. However, this market shakeout largely failed to materialize due to massive state intervention, ensuring the survival of non-marketable companies that could not survive on their own.

A comparison with other EU countries shows that Germany has significant differences in crisis management. Sweden and Denmark relied more heavily on digitalization and self-healing and less on direct business support. In Sweden, for example, almost all business processes were able to continue during the pandemic due to the high level of digitalization. In addition, corporate aid in Scandinavia was much more restrictive, while half of the state aid distributed in the EU went to German companies.

These effects are reflected in the insolvency figures since the start of the pandemic: in comparison, the insolvency rate in Denmark was twenty times higher than in the Netherlands and still more than six times higher than in Germany. Overall, the pandemic years in Denmark led to a 59 percent increase in insolvencies. In comparison: our Scandinavian neighbor had an increase of 78 percent from 2018 to 2023. Insolvencies in Germany last year were 11% higher than in 2018. In the Netherlands, on the other hand, the insolvency figures were actually far lower than in 2018 at -12%.

There is currently a big question mark behind the German economy. Compared to other economic regions, it is more dependent than average, but at the same time has received disproportionately high levels of state aid.

It is clear that the world is in the midst of an economic and geopolitical transformation. Away from fossil fuels, towards more digitalization and personal responsibility with higher demands on supply chains.

Germany is facing major challenges. The above-average dependence on other economic areas, combined with high levels of state aid, raises questions about long-term economic stability. In addition, the period of state intervention was not used to initiate necessary structural change and drive forward reforms towards digitalization and sustainable transformation. Instead, subsidies were applied for to keep outdated business models alive in order to avoid insolvency courts. There is a lack of clear guidelines and publication of the strategic direction on the part of politicians.

Many of the necessary resources are simply not currently available to the extent required or are tied up in companies that are not fit for the future. There is also a clear need to catch up in terms of transparency and publication deadlines. In most European countries, companies of all sizes are required by law to disclose their economic situation, including their profit and loss account (P&L), in a timely manner. In Germany, however, less than 2 percent of registered companies have a profit and loss account. A third are completely exempt from the disclosure obligations or are not afraid of the relatively minor consequences of failing to do so. Existing deadlines are also often not met: On average, the publication deadline of 12 months after the end of the financial year is exceeded by more than five months. Companies in other European countries would probably have been liquidated or at least closed down long ago if such violations had occurred. The EU, the federal government and the federal states need to take a more concerted approach here.

In order to protect your company in times of economic uncertainty and avoid insolvency proceedings and the court, it is essential to protect your own business riskmanagement and strengthen it. By precisely assessing long-term risks and taking appropriate measures, potential dangers can be identified at an early stage and negative effects on the business can be minimized. International crises in particular require a distributed strategy and an up-to-date data basis in order to make well-founded decisions. This is the only way to master the economic challenges ahead and enable sustainable growth.