Global Economy

Economics in Brief

The future-proof positioning of Germany's supply of mineral raw materials is key to safeguarding the country’s viability as a business location, also in view of rising minerals demand for use in future technologies. A study commissioned by KfW Research and compiled by IW Consult and Fraunhofer ISI analyses the raw material-related value added for the raw materials copper, lithium and rare earths. High dependencies exist in sectors that characterise the manufacturing industry in Germany. They are particularly pronounced in the motor vehicle and parts sector but also in the manufacture of electrical equipment, as well as electronic and optical products. Differentiated supply risks arise along the production and supply chains of the three raw materials due to various country risks and market concentrations. In view of the heterogeneous risk profiles, a modular approach can be used to make the future supply of raw materials more resilient.

Germany in the semiconductor supply chain: vulnerable on the imports side(PDF, 252 KB, accessible)

Further publications on the topic of foreign trade

International business in times of multiple crises: SMEs achieved a record result in 2022

Despite the long-term effects of the coronavirus crisis and the impact of Russia's attack on Ukraine, SMEs' foreign sales reached a record high in 2022 (+14% or +8% adjusted for price). Around one in eight euros of the total turnover of SMEs was generated abroad in 2022. Almost one in four SMEs were internationally active, the highest figure for 13 years. The majority of companies active abroad rely on exports to develop foreign markets. Only a few companies take the extra step to direct investment (2019–2022: 1.7%). Whereas the year 2022 was still characterised by a relatively good overall economic situation, by 2023 the global economic environment began to cloud over. The global economy and global trade are still feeling the effects of the crisis. However, there are already signs of improvement and optimism.

KfW Internationalisation Report 2024(PDF, 2 MB, accessible)

Further publications on the topic of foreign trade

The future-proof positioning of Germany's supply of mineral raw materials is key to safeguarding the country’s viability as a business location, also in view of rising minerals demand for use in future technologies. A study commissioned by KfW Research and compiled by IW Consult and Fraunhofer ISI analyses the raw material-related value added for the raw materials copper, lithium and rare earths. High dependencies exist in sectors that characterise the manufacturing industry in Germany. They are particularly pronounced in the motor vehicle and parts sector but also in the manufacture of electrical equipment, as well as electronic and optical products. Differentiated supply risks arise along the production and supply chains of the three raw materials due to various country risks and market concentrations. In view of the heterogeneous risk profiles, a modular approach can be used to make the future supply of raw materials more resilient.

Set in stone? The German economy’s dependency on copper, lithium and rare earths(PDF, 1 MB, accessible)

Economics in Brief

At the 28th UN Climate Change Conference (COP28) at the end of November, the first Global Stocktake (GST) process will assess progress made on climate action that was established in the Paris Agreement. Efforts to date have not been sufficient to achieve the global climate targets but there are promising approaches as to how a course correction can be made. These include the expansion of renewable energies on a broad basis, technological progress and innovation. Funding for the global target of adapting to climate change is also falling short of requirements. Here, an increase in international adaptation financing, more effective use of funds and the mobilisation of private capital are necessary building blocks for closing the gap. Finally, the urgently needed boost in international climate financing in emerging and developing countries has a decisive role to play. Transparency and global coordination are the unifying elements of all these issues.

COP28 Climate Conference: High time for a course correction and new avenues(PDF, 203 KB, accessible)

Economics in Brief

After a years-long, low-interest-rate environment, the COVID-19 pandemic and the Ukraine war have led to rapidly rising inflation rates. In order to fight inflation, the Fed began to lift benchmark rates in March and the ECB in July 2022. In addition, the central banks first rolled back their asset purchase programmes after years of quantitative easing before taking the further step of unwinding their asset holdings. The calculations presented in our most recent publication provide a rough indication as to how large the effects of quantitative tightening on inflation and GDP in the euro area and the US are (and could be in future) and how many interest hikes they substitute. The calculations indicate that the central banks' current monetary policy may already be more clearly in restrictive territory than the benchmark interest rate alone suggests.

Effects of quantitative tightening by the ECB and Fed on inflation and GDP(PDF, 132 KB, accessible)

One in every ten of the 3.8 million small and medium-sized enterprises in Germany compete internationally. Larger manufacturing firms in particular, which are among the main drivers of turnover, employment and investment in the SME sector, compete with foreign rivals. These often come from Europe but also from China, other regions of Asia and the US. German SMEs currently see themselves as being well-positioned in international competition in many respects. Most of them are also optimistic about their future competitive position but they also see a clear need for action. Eliminating bureaucracy, addressing the shortage of skilled labour, creating acceptance for the green transformation by preventing competitive disadvantages, safeguarding the supply of raw materials and energy and driving digitalisation forward are important steps.

KfW Internationalisation Report 2023(PDF, 2 MB, non-accessible)

Focus on Economics

Global value chains strengthen the economic linkages between countries. The COVID-19 crisis has also illustrated that while they can mitigate economic shocks and support a country’s ability to recover, they can transmit disruptions between countries at the same time. The economic slump was not necessarily deeper in countries that were more strongly integrated into the international division of labour. Still, businesses are well advised to incorporate adverse economic developments in foreign markets in their cost considerations. Given the growing geostrategic tensions since the outbreak of the war in Ukraine, they could also be encouraged to realign their international production networks in order to reduce dependencies and risks that are regarded as being too high from a societal perspective. A general retreat from the international division of labour, however, is not a sensible approach as it would cause considerable losses in prosperity.

Shocks, dependencies and trends – considerations on international production networks(PDF, 675 KB, accessible)

Focus on Economics

The size of the US economy, the depth of the capital market, the free convertibility of the currency and the trust placed in US institutions have helped the US dollar defend its position as a global reserve currency even after the end of Bretton Woods. To be sure, the share of currency reserves denominated in US dollars has fallen in the past decades, but at now roughly 60% the greenback continues to clearly assert its dominant position. In response to Russia’s war of aggression against Ukraine, the dollar’s dominance has been used as a ‘sanctions weapon’ for the first time in history, a development that will uplift the use of local currencies and alternative payment systems in Asia. But the alternatives to the dollar as a global reserve currency are generally limited. Neither the renminbi nor the euro nor cryptocurrencies will be able to challenge the greenback for the foreseeable future.

The US dollar’s dominance remains virtually unchallenged(PDF, 235 KB, accessible)

Focus on Economics

The record inflation rates of the past months have put pressure on the European Central Bank (ECB) and the US Federal Reserve to combat the sharp price increases with a more restrictive monetary policy. Whereas the Fed began its monetary policy turnaround already in March, it was not until the Governing Council meeting of July 2022 that the ECB changed its course. This Focus explains the different pace of the monetary policy measures thus far adopted by the two central banks with the dissimilar economic and labour market developments after the pandemic. As the ECB has taken longer to change its course, the window for comprehensive rate hikes to fight inflation appears to be much smaller because of the impending economic slowdown in the euro area. The ECB is in a difficult position and it appears less clear whether it can steadily pursue its course.

Two central banks – one problem: recession may follow inflation(PDF, 334 KB, accessible)

Focus on Economics

The transition to net zero and the digitalisation drive will significantly increase global demand not just for bulk metals such as copper but also for special metals such as lithium, rare earths and cobalt. Germany and Europe are heavily dependent on imports of these resources. Extraction and processing of special metals is subject to high supply concentration in individual countries, which for some is higher than for oil and gas production. For the positioning of European businesses in the area of strategic technologies such as lithium-ion batteries and solar technology, China’s strong market power is a particular challenge for the supply of raw materials and for Europe as a technology location in general. Pushing ahead with the circular economy, expanding resource extraction in Europe itself and diversifying international procurement sources are key to increasing the continent’s resource security.

Securing critical raw materials for the net zero and digital transformation(PDF, 295 KB, accessible)

The war in Ukraine has caused new disruptions to global supply chains, which were already under severe pressure from the coronavirus pandemic. Small and medium-sized enterprises also remain under great strain from supply bottlenecks. Particularly hard hit are the SMEs that source raw materials, intermediate inputs or services from abroad – especially from China, Russia and the United Kingdom. As a result of the material shortages, one in four SMEs have had to raise their prices. Supply bottlenecks remain a major driver of inflation. The coronavirus pandemic and supply chain disruptions have also made a mark on Germany’s exports and thus on the international turnover of small and medium-sized enterprises. In 2020 they plummeted by around 11%. At EUR 533 billion, they were at the lowest level in more than ten years. In 2021 the international turnover of small and medium-sized enterprises recovered slightly but remained below pre-crisis levels. There is great uncertainty as to how things will develop.

KfW Internationalisation Report 2022(PDF, 1 MB, non-accessible)

Focus on Economics

The monetary policy reversal in the US will impact on the global financial markets. It will place emerging economies at risk of capital outflows, as happened in 2013, with the possible consequence of a spike in volatility in the bond and currency markets. However, the macroeconomic conditions of many emerging economies have improved significantly since 2013. For example, current-account deficits have been reduced and currency reserves built up. The study looks at macroeconomic indicators of six emerging economies and shows that these developed overwhelmingly positively in five of the economies examined. The sole exception is Turkey, which appears to be significantly more vulnerable today than in 2013.

Taper Tantrum 2.0 appears unlikely(PDF, 201 KB, non-accessible)

Focus on Economics

The slowdown in the momentum of globalisation is pushing enterprises to reassess the viability of their business models, realign their export strategies and develop new sales potentials. The Prognos study identifies three main areas in which German businesses can make adjustments: One option is to focus more strongly on the domestic market, another is to develop new, innovative export goods or services. Here, growth opportunities arise primarily from the megatrends of demographic change, digitalisation and climate and environmental protection. A third strategy consists of tapping into new, promising export markets, particularly in emerging and developing countries. This offers different starting points for policymakers to support enterprises.

Low globalisation momentum requires adjustment of German companies’ growth strategies(PDF, 238 KB, non-accessible)

Focus on Economics

The effects of globalisation on growth, value added and employment in Germany in the next ten years are analysed with the aid of three scenarios. A renewed globalisation surge with a strong increase in openness to trade, with an average growth of gross domestic product of 1.2% per year between 2023 and 2030 is the best scenario, while a deglobalisation and, thus, decreasing openness with 0.9% growth is the worst scenario for the German economy. Between these two lies the scenario of a continuation of the slower globalisation of the past ten years, which is considered to be the likeliest of the three.

What’s next for Germany’s growth model? Scenarios for globalisation(PDF, 263 KB, non-accessible)

Focus on Economics

The novel coronavirus spread worldwide within a very short time in early 2020. By the end of 2020, it then became apparent that the severity of the coronavirus pandemic determines how wide the economic output gap to the pre-crisis level still is. However, being well prepared for a pandemic in terms of structures and regulations alone did not guarantee success in containing the coronavirus. Rather, countries have to sustain the political and societal costs of the containment measures. In the upcoming phase of the pandemic response, the healthcare system must quickly enable a fast-tracked vaccination programme. As climate change can be expected to lead to an increase in infectious diseases, being prepared for a pandemic needs to be integral to a sustainable economic model.

A successful pandemic response requires more than basic preparedness(PDF, 185 KB, non-accessible)

Focus on Economics

Since 1990, regional trade agreements have become both more numerous and more comprehensive, due in part to the stagnating multilateral negotiations within the WTO. The World Trade Organisation has recorded 305 such agreements. In addition to customs matters, they increasingly cover non-tariff trade barriers, define rules for trade and establish transnational standards. Their content reflects an evolving global trade landscape. Aspects such as services, investment and capital flows, but also digital trade, are becoming increasingly important. When countries enter into mega-regional agreements, which cover a substantial part of global trade and foreign direct investment and therefore constitute the largest plurilateral forums outside the WTO, political interests also play a role.

Pragmatism in trade policy: regional trade agreements(PDF, 228 KB, non-accessible)

Focus on Economics

The coronavirus pandemic has hit the global economy hard and caused international trade to plummet. Being part of global value chains, German SMEs have also been affected by falling demand and disruptions in production abroad. The crisis experience is likely to prompt many businesses to review and adapt their sales and procurement strategies in the long term. In particular, SMEs whose own supply chains were disrupted by the coronavirus crisis expect many businesses to withdraw from global value chains.

Globalisation lost momentum even before the coronavirus hit. This trend could intensify further if an increased focus on national interests were the response to the global recession. Hampering international trade reduces options for diversifying country-specific risks. Improved international cooperation is therefore more important than ever.

Short-term shock with lasting effects: The coronavirus crisis and international value chains(PDF, 230 KB, non-accessible)

The coronavirus crisis and its impact

Focus on Economics

The German Federal Government regards private sector investment as crucial to Africa's economic development. However, German enterprises so far have invested relatively little in Africa. A key mechanism available to the Federal Government for promoting foreign direct investment is its set of foreign economic policy instruments. There is constant debate about whether to expand these promotional instruments with the aim of increasing the engagement of German firms in Africa. We have therefore examined the extent to which these instruments are effective in the African context and whether increasing the volume of guarantees for investments, for example, would lead to the desired result.

How effectively do Germany’s foreign trade and investment promotion schemes support investment in Africa?(PDF, 339 KB, non-accessible)

Economics in Brief

Trade conflicts, Brexit, sanctions, geopolitical confrontations and now the coronavirus outbreak: Difficult international conditions are putting constant pressure on global trade. This is not just afflicting Europe’s exporters but also causing a noticeable slowdown in economic activity in the euro area.

However, the weakness was not spread equally across all sales markets of European exports last year. Rather, the loss of momentum since 2017 has been mainly due to China and the dynamic Asian economies that are closely intertwined with that country. So in addition to the trade conflict, other factors such as the transition of the Chinese growth model, the accelerated expansion of e-mobility and the downswing in the global electronics cycle have probably also played a role in the region’s slowing demand for European goods.

Export weakness under the microscope: Where are the headwinds in the euro area coming from?(PDF, 86 KB, non-accessible)

Focus on Economics

International shipping releases more CO₂ emissions than all of Germany. Already today, however, there are enough viable technological solutions to prevent this. Many stakeholders are also aware of the problem and going new ways. But many conditions pose a challenge, such as inadequate legal frameworks. Still, the momentum that can be observed in some segments of maritime shipping can teach very valuable lessons.

Climate action in shipping is very similar to global climate action but the stage is much less complex. In this sense, maritime shipping can be seen as a laboratory in which new solutions are developed and trialled. This Focus puts a spotlight on this aspect and discusses selected strategies for new avenues.

Sustainable maritime shipping and climate action(PDF, 225 KB, non-accessible)

Amid a contraction in overall economic output in Germany, the euro area’s largest economy, the monetary union as a whole nevertheless managed to achieve meagre growth of 0.2% on the previous quarter.

We are now more sceptical about the further outlook than in the spring. The most recent business surveys show that there is no end in sight to the industrial recession. The escalating trade conflicts and the UK government’s confrontational Brexit strategy are both taking their toll.

We therefore expect the economic weakness to continue until mid-2020 and have downgraded our growth forecast slightly to 1.0% for the current year and sharply to 0.7% for the coming year.

KfW Business Cycle Compass Eurozone September 2019(PDF, 183 KB, non-accessible)

Focus on Economics

It is easy to call for structural reforms to boost productivity and economic growth. Their implementation is complex, however, as it requires decisions on the design and, hence, the composition, timing and sequence of changes, as well as decisions on the design of the policies through which reforms are implemented. The political and economic factors that determine the introduction and implementation of structural reforms are therefore diverse.

Structural reforms – easier said than done(PDF, 339 KB, non-accessible)

Focus on Economics

Côte d’Ivoire is currently planning its transition from developing to emerging economy. The basis for this is an ambitious development plan by the government, which provides for a structural transformation of the economy and aims to make the robust economic growth more inclusive. A key role will be played by targeted expansion of the industrial base and modernisation of agriculture. In this respect the West African country has already enjoyed some success. However, for transformation of the agricultural sector to succeed, further specific improvements are required to the economic framework. The more swiftly these changes take place, the more likely it is that Côte d’Ivoire can achieve its ambitious development goals.

Côte d'Ivoire – more than just cocoa!(PDF, 290 KB, non-accessible)

Focus on Economics

Ethiopia plans to join the league of emerging economies by 2025. This vision received new momentum under Prime Minister Abiy Ahmed, who has been in office for the past year. The emerging industrial sector occupies a key position in this endeavour. But whether this sector will be able to lay the economic foundation for further expansion must be critically assessed with a view to Ethiopia’s past and future development and slowing global economic growth.

Ethiopia in 2025: an up-and-coming industrial hub in Africa?(PDF, 310 KB, non-accessible)