Will surge in German business bankruptcies hit growth?

Germany is grappling with a surge in company insolvencies, according to recent data from the Halle Institute for Economic Research (IWH). The insolvency rate among partnerships and corporations in June was 80% higher than the average for the same month in 2016-2019, prior to the COVID-19 pandemic. This figure is the highest in 20 years, as reported by Steffen Müller, head of insolvency research at IWH.

The increase in bankruptcies indicates a struggling economy, with major companies like Volkswagen and ZF planning significant job cuts. However, insolvencies can also have positive effects by allowing unproductive companies to exit the market and freeing up resources for more productive sectors. This phenomenon, known as "creative destruction," can promote economic growth.

While unemployment has been slowly rising, most people losing jobs find new positions. Additionally, the number of newly founded businesses has increased, which is a positive sign. However, the insolvency crisis is affecting a wide range of industries, including automotive manufacturing, mechanical engineering, construction, restaurants, and retail.

Some experts argue that the situation is more than just a market correction and represents a deeper structural weakness in the German economy.