RaboResearch - Economic Research

Country Report Germany

Country Report


Germany flag

The German economy performs well due to their competitive export sector and improving domestic demand. The housing market in the big cities is buoyant, but countrywide, there are no signs of overheating. 


Strengths (+) and weaknesses (-)

(+) Competitive export sector

Germany’s export position profits from the combination of wage moderation over a prolonged period, strong productivity growth and high world demand for its products.

(+) Large, positive, net international investment position (NIIP)

As a result of its competitiveness, Germany is having a current account surplus since 2002, which averaged around 5%-GDP over the last 10 years. This results in a large NIIP (42%-GDP in 2012).

(+) Stable public finances

Although the public debt is still high (80%-GDP in 2013), it is on a downward path (the IMF expects public debt to be 68%-GDP in 2018). This is due to sound fiscal policies that are supported by a debt brake rule, that will come into force in 2016.

(-) Ageing population

Germany’s working age population has declined since 1998. The expected further ageing of the population will put a strain on government finances and growth perspectives in the medium-term. 

Key developments

1. Economy is doing reasonably well

Real GDP growth softened to 0.5% in 2013, after 0.9% in 2012. This slowdown was mainly due to the unusually cold winter that had a big impact on the first quarter. Whereas growth was mainly driven by domestic demand in the first three quarters of the year, real GDP growth was almost totally driven by net exports in the final quarter of 2013. Going forward, we expect a strengthening of growth to 1½% in 2014 and 1¾%  in 2015, which are both above the potential growth (1¼% according to the IMF). The expected acceleration of growth is mainly due to an improvement in domestic demand. The outlook for private consumption is rosy, due to rising real wages,  low unemployment and strong consumer confidence. Also private investment is expected to increase, due to a capacity utilization rate that is slowly returning to its long-term average, and the more favourable financing conditions.

Also the outlook for German exports remain positive. The gradual recovery of the economy in the eurozone, by far the biggest trading partner of Germany, and the accelerating growth in the US bodes well for exports. On the other hand, the emerging economies are slowing down. In the past years, a large part of the export growth came from exports to these countries (mainly Asia, figure 1). Whereas Germany was having an increased trade surplus with countries outside the eurozone, their trade within the eurozone became more balanced.

2. New government introduces a few measures that will support domestic demand

The September-2013 elections resulted in a new German coalition, consisting of the Christian democrats (CDU and CSU) and the Labour party (SPD). The new government introduced a minimum wage (8.50 EUR/hour) that will take effect from 2015, but with exceptions available until the end of 2016. A risk is that the minimum wage will increase unemployment, though in the short run this does not seem to be an issue, since the current labour market is tight. Also the competitiveness of the German exports will not be hurt, since most employees in the export orientated industry are already covered by a collective wage agreement above 8.50 EUR/hour. Since the minimum wage will increase the pay of the lowest paid employees, the policy will support private consumption. Another measure that will increase domestic demand is the increased government investment spending on infrastructure and schooling. In the short-run, the public finances will remain solid. The government had a minor budget surplus in 2012 and 2013, which is expected to increase in the coming years. As a result, the public debt is on a downward trajectory (the IMF expects public debt to be 68%-GDP in 2018). The long-run outlook for the public finances became a bit bleaker, due to promised increases in pension spending and a lowering of the pension age to 63 for employees that worked at least 45 years. Since the population is ageing fast (figure 2) and the state pension is based on a pay-as-you-go pension system, this heightens the future burden of ageing on the public finances.

Figure 1: Trade surplus almost at record high
Figure 1: Trade surplus almost at record highSource: Reuters Ecowin
Figure 2: Population is ageing fact
Figure 2: Population is ageing factSource: Reuters Ecowin

3.The financial sector became more stable

The German banks increased their capital buffers since the offset of the global financial crisis. The Tier 1 capital ratio increased from 9.2% in 2008 to 14.8% in 2013H1. Moreover, the banks reduced their risky assets by about 12% in the year up to June 2013 according to the Bundesbank. Especially the Landesbanken (regional banks owned by the state government) reduced their balance sheets by almost 30%, by refocusing on their domestic market. During the Global Financial Crisis, many of these banks had to be supported by the government. Of the financial support measures provided to both public and private banks, all guarantees have been returned without claims. Of the 29.4 bn euro provided capital support to ailing banks, 12.3 bn euro has been repaid. The profitability of the German banking sector is still a concern, since the interest margin decreased due to heavy competition (resulting from overcapacity in the sector).

4. House prices rise, but overvaluation is limited to the biggest cities

The housing market remained buoyant in 2013, especially in the major cities. In line with the developments in the previous year, prices rose the fastest in the seven largest cities (9% y-o-y), while prices rose only 3¼% nationwide. Demand for housing is supported by the low interest rates (average mortgage rate in 2013 was only 2¾%) and risen income expectations. The higher prices do, however, not yet lead to a strong growth in mortgage lending (only 2¼% in 2013). The price increases results in a higher amount of building permits, which indicate that housing supply will be expanded, which can take away some of the price pressures. The Bundesbank estimates that house prices in the biggest cities are overvalued by about 25%. At the same time, the fundamentals data do not indicate overvalued house prices countrywide. The price-to-rent ratio was 85.1, while the price-to-income ratio was 79.2. For both ratios, the historical average is 100.

Factsheet of Germany
Factsheet of GermanySource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Germany is the fourth-largest economy of the world. Its economic growth has been primarily driven by exports during the last decades. After the reunification a strong wage increase led to a deterioration of export competitiveness, which got them the nickname ‘the sick man of Europe’. Through a long period of wage moderation and productivity increases, competitiveness has been restored. Nevertheless, the country suffered a severe recession in 2009. The recovery was stronger than in most other countries, due to high demand for their export products (especially cars) from emerging markets (especially China). Unlike in other eurozone countries, unemployment decreased between 2007 and 2013 and that is often attributed to the labour market reforms (Hartz) of 2003. The private sector debt (111.9%-GDP in 2013Q3) is relatively low compared to the average in the eurozone (163.8%-GDP), which makes private sector deleveraging not necessary. Although the public debt is still high (80%-GDP in 2013), it is on a downward path. The debt brake rule that forbids the government to run a structural deficit in excess of 0.35%-GDP from 2016 onwards, ensures that the fiscal position will not deteriorate in the future. A long-term challenge for both economic growth and the public finances is the ageing population. The primary pension is a state pension (78% of total pensions), which is a pay-as-you-go system that will be difficult to finance with a fast ageing population. The banking sector has assets equal to about 309%-GDP and have a large amount of banks that can be separated in roughly three sectors, private sector banks (39%), public sector banks (including Sparkassen and Landesbanken) (28%) and cooperative & mortgage banks (21%). The domestic exposure is fairly concentrated in mortgages. After the Global Financial Crisis, the banks increased their capital buffers. 

Economic indicators of Germany
Economic indicators of GermanySource: EIU

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