Ageing Workforce a Lone Cloud on German Economic Horizon, says Moody’s

Germany’s AAA rating with stable outlook reflects the country’s advanced, diversified and highly competitive economy, and its track record of stability-oriented macroeconomic policies, says Moody’s.

However, in its latest report on Germany the credit ratings agency (CRA) warns that a declining workforce and ageing population could negatively affect the country’s potential economic growth rate and the sustainability of social security systems.

Moody’s stresses that the report is an update to the markets and does not constitute a rating action.

“Germany has a very large and highly competitive economy, which is very well integrated into global trade and capital markets. It also benefits from a large domestic market,” said Thorsten Nestmann, senior analyst at Moody’s.

Germany is the world’s fourth-largest economy, with a nominal gross domestic product (GDP) of US$3.6 trillion in 2013, after the US (US$16.8 trillion); China (US$9.2 trillion) and Japan (US$4.9 trillion).

Germany’s real GDP growth slowed to 0.4% in 2013 against the background of a difficult external environment and was driven solely by private and government consumption. Moody’s expects though that GDP growth will increase by 1.7% in 2014 and 2015, due to stronger private consumption and a pick-up in investment.

The CRA adds that the German economy is highly competitive, both from a price as well as a non-price perspective. The country’s relative unit labour costs and the real effective exchange rate (REER), which are proxies for price competitiveness, have improved relative to European peers, despite the rise in the country’s relative unit labour cost and REER in 2013. In terms of non-price competitiveness, Germany benefits from strong rule of law, a low level of corruption, good infrastructure and its capacity for innovation.

Germany’s institutional strength is based on a considerable degree of transparency and consensus on key policy goals as well as the very high credibility and effectiveness of policies. “Germany has proven its ability to absorb large structural shocks, such as the reunification in the 1990s,” said Nestmann.

Moody’s also views favourably Germany’s continued commitment to fiscal consolidation throughout the euro area crisis, exemplified by the government’s compliance with the fiscal compact and its self-imposed debt-brake rule, posting a balanced budget already in 2012.

However, Moody’s notes that Germany, more than many other countries in the Organisation for Economic Co-operation and Development (OECD), faces an ageing population and a declining workforce.

According to the OECD, Germany’s potential GDP growth will fall to 0.7% by 2025 from 1.6% in 2012, primarily because of a decline in potential employment. Recent pension reforms, which will cost around €160bn (in 2013 prices) until 2030 or around 2.2% of 2013 GDP, will further compound the

demographic challenges faced by the country.

Downward pressure on Germany’s AAA rating could occur if Moody’s were to observe a prolonged deterioration in the government’s fiscal position and/or the economy’s long-term strength. Furthermore, a renewed intensification of the euro area debt crisis, in particular if large countries such as Italy and Spain were affected, would also be credit negative.

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