The federal elections and the international motor show have pushed Germany to center stage in September. Sylvain Broyer, Head of Economics at Natixis, shares his views on Germany’s environment and economic outlook.
1/How would you describe Germany’s economic situation?
What are the strengths and weaknesses of the German economy?
On the one hand, Germany is in excellent shape. Companies are exporting at an all-time high and household spending power this year is beating records. The government is paying down debt and full employment is a fact. The outlook is extremely bright for the country’s youth as the number of people aged 20-24 with no job, no training and no trainee program has declined and is the lowest of all G7 countries. Germany undertook reforms and its education system has made huge strides as a result. This is evidenced by improved scores in the OECD*’s PISA** tests and by the increase in the number of graduates in science fields.
But on the other hand, a number of obstacles still remain.
- The sharp pace of Germany’s energy transition has eroded its cost competitiveness. Its share of renewable energies surged from 6% to 20% in less than ten years.
- Admittedly, as far as robotization is concerned, Germany is an equal match for Japan and South Korea, two other highly industrialized countries with an ageing workforce, but it is not at the cutting-edge of technology for digitalization. It even lags in developing online administrative services owing to the lack of public investments.
- Integration of refugees in the workforce is another concern: only 13% of refugees find a job.
- Last, the risk of becoming a member of the working poor has grown considerably. In the space of ten years it has risen from 10% to 16% and affects predominantly the senior segment.
*Organisation for Economic Cooperation and Development
**Programme for International Student Assessment (PISA) is an international survey which tests the skills and knowledge of 15-year-old students in 72 countries
2/What is the likely outcome of the elections on 24 September? What are the markets anticipating? And what are the possible implications for the German and eurozone economies?
The German elections have not sparked the same interest in the markets as the French elections. Wrongly, however, as although the conservative CDU/CSU bloc is slated to retain the Chancellorship, its choice of governing alliance will be pivotal. Germany may be more inclined to equip the eurozone with shared budget capabilities if the coalition retains power. Conversely, if the conservatives form a partnership with the liberals, Germany may push for a multi-speed eurozone and adopt measures to deal with sovereign state bankruptcies.
But irrespective of the result, Germany is likely to change its budgetary policy. Most political parties are pledging tax cuts for families and increases in public investments. This would boost growth but it would not have a substantial impact on the current account surplus.
Last, the Franco-German engine is still in need of a kick start. The concerns of the German Chancellor and the incoming French President are not always identical. The main issues facing the German electorate are social inequality, low returns on savings and immigration control. These are the only topics that Germans want Europe to deal with.
3/Can euro appreciation upset the robust pace of German exports?
The euro is not that strong. In real terms and placed against all the currencies of its principal trading partners, the single currency is actually trading at its lowest level for the past decade. More than anything, what we are seeing today is a weak US dollar which is the result of the twists and turns of the new US government administration, and more recently of the anticipated effects of hurricanes.
Second, the sensitivity of German exports to exchange-rate appreciation is negligible. German industry has long been adept at living with a strong currency. What’s more, this characteristic intensified with the creation of the eurozone as the parity of the Deutsche Mark against the euro was fixed at a record high, reflecting the country’s economic performances at the end of the 1990s.
4/The international motor show (IAA 2017) is currently on in Frankfurt. Is the automotive sector still the flagship of German industry?
The automotive industry is undeniably a key sector of the German economy. Germans take great pride in saying that they invented the car! The auto industry generates 4.5% of German GDP, 17% of the country’s exports and, in the strict sense of the term, accounts for 1.8% of the workforce. The figure is twice that if you take into account the contribution of third-party sectors involved in automotive production such as transport, financing and IT services.
German cars lost some of their sheen when the Dieselgate scandal broke. Allegations of collusion have also tarnished the industry’s image. German carmakers are also behind in electric car technology. That said, this is not the first scandal the German car industry has weathered – in particular Volkswagen – and history shows that the German government has always been willing to support its national powerhouse.