Our Opinion: 2016
Germany’s economic mirage
Most commentators are optimistic on the prospects for growth in the European equity markets. Company earnings are growing and monetary easing aids the chances of a continued recovery.
However, the outlook in the Euro-zone’s powerhouse, Germany, is less certain. Growth last year was a solid but unspectacular 1.7%, and this year forecasters expect 1.4%. A slowdown in China and emerging markets has undermined activity in Germany’s crucial export sector. Machinery sales to China fell by 6% last year. Selling more to slower-growing Europe and the US is unlikely to plug the gap.
Meanwhile, consumption, which has been driving growth recently, could be weakened by lower wages, which have started to fall in line with low inflation.
The longer-term outlook isn’t very encouraging either. The ageing population implies a rapidly shrinking workforce. Chancellor Angela Merkel recently warned that around six million workers would be lost over the next 15 years. The demographics suggest Germany’s potential growth rate could fall to 1% in a decade, according to a 2014 OECD report.
That makes boosting productivity all the more important, but in this respect Germany is going backwards. It urgently needs to boost capital investment, which has been falling as a share of GDP since the 1960s and, according to Bloomberg, has been below the European average since 2001.
This is starting to show: infrastructure is in dire need of an overhaul. According to a report in 2013, 20% of the 67,000 bridges owned by local authorities need repairing or complete replacement. Education spending is also falling behind. Germany’s top-rated university is around number 50 in the global rankings.
An easy way to bolster productivity would be to liberalise the overregulated and bureaucratic services sector. However, thus far, there has been no obvious sign of political will to achieve this.
Against this background, David Charter in the Times recently said that Merkel’s “economic miracle is beginning to look like a mirage.”
Germany has long been the Euro-zone’s powerhouse. But that may not be the case for much longer.