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erman car exports were also likely to be affected by the uncertainty of Brexit. Britain was Germany’s second-largest export market for cars in 2018. The value of exports in 2018 was 19.3 percent lower than in 2015. There have also been declining total car sales in China, where monthly car sales have fallen for 18 consecutive months, with an 8.1 percent overall decrease over 2019. China is Germany’s third-largest export market for cars. Volkswagen is the market leader, with a share of 18.5 percent in 2018. Any economic effect from the coronavirus is likely to depress car sales still further. Several German car makers have factories in China, so the slowdown hurts German auto manufacturers on two fronts. The economic impact of the transition to electric cars cannot be underestimated. Volkswagen’s 2015 Dieselgate scandal has forced a faster transition than planned. Policymakers have put targets in place, and car makers are scrambling to keep pace. In the longer term, moves away from global free trade will hurt Germany’s key industries. It will decrease exports and force changes in the country’s global supply chains. Germany is more vulnerable than its peers to a rise in global protection. In 2017, trade was 86.5 percent of German GDP. For the UK it was 61.4 percent, China 38.2 percent, Japan 34.6 percent, and the US 27.1 percent. Germany will face increasing competition from China across a range of exports. China’s R&D spending is pushing it into advanced manufacturing segments where it competes with Germany and other leading manufacturers. Chinese product quality is improving, while Germany’s spark has waned. A recent study by the Bertelsmann Stiftung institute found that only one in four German firms is innovative enough to be internationally competitive. Firms often lack the size to compete with Chinese counterparts. China is improving access to export markets and cheaper inputs through its Belt and Road initiative. This is increasing competition for German products and inputs in many Asian markets. Germany’s energy policy will also weigh against growth in the longer term. After the Fukushima nuclear disaster in 2011, Germany shut down seven of its plants and plans to close its last in 2022. It is also phasing-out coal-fired plants to reduce greenhouse gas emissions. The last coalfired plant will be closed in 2034. In January, the government announced a €44.5bn compensation package for the coal and coal-power industry. Renewable generation (now at around 40 percent of total supply) is better for the environment, but 52
"Germany’s demographic decline is the largest concern for the long term." comes with reduced economic growth, at least in the short- to medium term. Higher electricity prices mean less money spent on other goods and services. In 2019, Germany had the highest household electricity prices in the EU (for a medium household). Prices have increased by 30 percent from 2010 levels. Some experts predict that prices will increase by another 20 percent with the phase-out of coal. Low productivity is a longer-term growth concern. The increase in employment following the Schroeder labour market reforms led to a decrease in average labour productivity per worker. This reflected the lower productivity of new workers and their concentration in the service industry, which has a lower level of productivity than manufacturing. Since the 2000s, labour productivity has not recovered, despite increased investment in ICT. Germany’s demographic decline is the largest concern for the long term. According to the UN’s 2019 population estimates, the population is expected to decline and age over the next 80 years. The total dependency ratio (the percentage of the population supported by the working-age population) has been growing from a post WW2 low of 45 percent in the mid-1980s, and is expected to reach over 80 percent by 2055. The working age population peaked in the mid-1990s at 55m. It is expected to decrease after 2020 as Baby Boomers retire; by 2035, it is predicted to be around 47m. By 2100, it will be just above 40m. Immigration places Germany in a much better situation than many other European nations. Despite this, the future remains stark. In Japan, the demographic decline is more advanced and pronounced. In the 27 years since the collapse of its asset bubble in its 1992, and the steady fall of its working age population from 1995, Japan’s annual real GDP growth has exceeded two percent only five times — and has averaged just 0.91 percent. For 2020 to 2025, the IMF estimates annual growth of 0.5 percent. Japan has responded with three main policies. The central bank cut interest rates, reaching zero by the start of the 2000s. It then pioneered quantitative easing. It was not enough to kickstart strong growth. The government also began to spend on infrastructure. The results have been mixed, CFI.co | Capital Finance International
but one thing is clear: Japan has little monetary or fiscal room for further stimulus. Its public debt rose from 64.3 percent in 1990 to 237.7 percent in 2019. Japan has also invested heavily in robotics and automated production. The goal is to increase labour productivity as the number of workers declines. Japan remains in the top four countries for the number of robots per industrial and manufacturing worker (3.03 in 2017). This has resulted in increased productivity in manufacturing. In contrast, the service sector has remained flat. Automation and AI are starting to make inroads and promise to unlock productivity gains. Of these policies, spending on infrastructure and increased automation holds the most promise for Germany. The Euro area has had a zero-interest rate since June 2014, and quantitative easing was restarted in September 2019. In terms of fiscal stimulus, Germany has the means, but does it have the will? Since 2012, Germany’s overall fiscal balance has been in surplus. As a result, pubic debt has decreased from 81.05 percent of GDP in 2012 to 58.6 percent of GDP in 2019. It is expected to reach 50 percent by 2023. The average for advanced economies in 2019 was 104 percent. Germany could use its fiscal capacity for stimulus on infrastructure. According to the European commission, Germany has underspent on infrastructure since the early 2000s. Such spending would provide a longer-term growth dividend beyond its initial stimulatory impact. The Germans are proud of their fiscal conservatism; Japanese levels of public debt are unfathomable to them. In 2009, Germany enshrined stricter fiscal rules into the constitution. Federal government deficits must be no more than 0.35 percent of GDP, and state governments must run balanced budgets from 2020. Germany introduced the limits to prevent future increases in public debt, such as the increase after the global financial crisis. German manufacturing has a high level of robot density, ranking third in the world; one spot ahead of Japan but lagging Singapore (4.38), and South Korea (6.31). Like Japan, Germany has yet to see strong productivity growth in the service sector. But new breakthroughs in AI have the potential to increase productivity in services. There are more mundane gains to be had, according to the OECD. Staff and management can be better trained to take advantage of ICT. Whatever happens this year, German growth is facing strong headwinds over the longer term. Japan provides lessons — and a cautionary tale. i