Germany risks lengthy economic stagnation without structural policy change and refreshed political leadership, with tepid global growth and splits to re-emerge in the country’s increasingly unpopular governing coalition. Scope Ratings GmbH says the 1.7% decline in industrial production from September to October (5.3% decline y-o-y) confirms the weak economic outlook for Germany in 2020. Scope forecasts only 1% growth in 2020, following near stagnation in 2019 (0.5%). Trade tensions and other external factors are bringing a long-running cyclical upswing to a near halt.
“Germany’s policymakers and businesses will have to meet difficult structural challenges if the country is to raise and realize its medium-term growth potential,” Bernhard Bartels, Scope’s lead analyst for Germany, says. “Higher public- and private-sector investment is vital if the government is to oversee the country’s successful energy transition and address social pressures stemming from its ageing population. Preserving Germany’s economic leadership in Europe also requires sizeable government spending into the country’s physical and digital infrastructure, including more expenditure on education and encouragement of innovation”.
In ten years of economic expansion, Germany’s export success has covered internal weaknesses, especially the lack of investment. Net fixed capital formation in the private sector averaged just 2.3% of GDP p.a. over the past 16 years (2004-2019), compared with 3.5% in the euro area. During the same period, net capital formation by the public sector was even slightly negative (-0.01%) compared to 0.5% of GDP in France and 0.37% in the euro area as a whole. Instead, Germany has invested assets abroad with the net international investment position increasing to 62% of GDP (€2.07tln) in 2018 from zero in 2002.
The German government has been reluctant to fill the emerging investment gap (currently at around 5% of GDP) in the absence of sufficient private-sector activity. Institutional barriers help to explain the low investment share of the public sector, not least the commitment of the governing coalition of the Christian Democrats and the Social Democrats to balance budgets expressed via a “black zero” rule, which precludes a broad-based state-financed investment program. The debt brake embedded in Germany’s constitution also prevents higher spending in the medium term and will become binding for German regions next year.