Article / 11 September 2017 at 9:00 GMT

'Zip, zero, zilch: that's what Merkel has delivered' — #SaxoStrats

Head of Macro Analysis / Saxo Bank
France
  • Merkel sure to win upcoming German election
  • Chancellor has largely shied away from economic reform
  • German investment rate, productivity growth languishing

BMW
BMW headquarters in Munich: Germany has an enviable assortment of international firms, but its economic fundamentals are shakier than many assume. Photo: Shutterstock 

By Christopher Dembik

It is unquestionable that Germany has incredible strengths, such as its low unemployment (5.6% at the national level and down to 3% in Bavaria), its triple-A credit rating, and its pantheon of international firms whose reach spreads over the globe. 

That’s the shiny side of the coin, but there is also a more tarnished one: fundamentally, Germany’s economy is dysfunctional. 

The country's massive current-account surplus, reaching 8% of GDP, is praised by policymakers as an undeniable characteristic of high competitiveness, but it is also a sign that local businesses are reluctant to invest in the country. A similar trend, though less exacerbated, can be found in the Nordic countries.

Current account surplus
Consequently Germany has the lowest investment rate of any developed economy, according to the International Monetary Fund. The most worrisome factor is the low level of investment in equipment, leading to a lesser accumulation of capital that could hamper economic growth in the medium term. 

The decline in capital stock could also be accentuated by negative demographic trends. All forecasts put forth by the German statistics agency confirm a population decline that could prove crucial over the next few decades, depending on the fertility rate and (especially) immigration.

Population projections

Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank 

The low level of investment in equipment has been partly offset in recent years by higher investment in research and development, but so far it has not been enough to increase potential growth through higher overall productivity. 

This fact is not known by many people: Germany’s average annual productivity growth over the past decade has not been that high at just 0.7% – lower than both Portugal (0.9%) and Spain (1.2%). This clearly underscores the limits of the so-called German economic miracle, which is largely based on low-paid and low-skilled jobs in the service sector.

German productivity
 
Since 2005, Merkel has delivered zip, zero, zilch in terms of economic reforms. Her most prominent decision was the introduction of a minimum wage, which proved a tough battle. As a matter of fact, her time as chancellor has mostly been spent curating Schroder and Hartz’s legacies. 

According to the Organisation for Economic Co-operation and Development, Germany has pushed through the least amount of pro-growth reforms among developed countries over the past seven years. As a result, it should not be surprising to observe that Germany languishes in 114th place globally for ease of starting a business, versus 56th for Greece and 27th for France. 

Ease of starting a business
Source: World Bank

For now, no European Economic and Monetary Union country is in a position to challenge Germany’s economic and political leadership. However, Berlin would be wrong to be complacent and push back the necessary reforms to boost productivity, reinvest the current-account surplus, and pay fairly workers for their due. 

The longer it takes to do so, the more painful it will be for the economy. There is no doubt that Merkel will be reelected. However, this term might be quite different from the others since she has no other choice but to push through these difficult reforms.

Angela Merkel
It is increasingly a question of her legacy. Photo: Shutterstock

— Edited by Michael McKenna

Christopher Dembik is head of macro analysis at Saxo Bank

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail