Is Europe´s Economic Powerhouse in for a Bumpy Ride?

Investors find Germany highly attractive, and analysts regard its economy overall to be highly competitive. Indeed, the country’s enviable post-war record of steady economic growth, low unemployment and social stability have made it Europe’s economic power house. However, with many of its eurozone neighbours still struggling to emerge from recession will Germany continue to enjoy smooth sailing, or is it headed for a bumpy ride?

The Case for Smooth Sailing

There is no shortage of reasons that support the idea that Germany’s economy will continue to enjoy a smooth passage in the year ahead and beyond.

  • Firstly, the German budget will be slightly in surplus (officials refer to this as a ‘black zero’). This should certainly be positive for the economy. Unlike some other eurozone countries, such as Greece there is little threat that there will be major cutbacks to impact on social services and state pensions.
  • Secondly German interest rates are likely to remain extremely low, thus stimulating investment as a result of the low cost of borrowing.
  • Germany´s economy benefits from a well-trained and highly productive labour force. Through the country’s dual education system (Berufsschulsystem) youth unemployment is kept in check. Couple that with good labour relations (Mitbestimmung) and the result is a stable social climate.
  • While other European countries have lost jobs since the 2008 global financial crisis and are challenged by their unemployment rates, employment in Germany is at an all-time high: according to Bundesbank statistics, the German unemployment rate remained stable in 2014, fluctuating between 6.6 and 6.8%. As of January 2015 the unemployment rate stands at 6.4%, the lowest since 1991 and a figure which is the envy of many other countries within the European Union (EU).
  • Finally, Germany enjoys a robust entrepreneurial culture, driven by the large number of medium-sized businesses (Mittelstand), which continue to invest in technology.

Clouds on the Horizon

Despite all of these positive features there are clouds on the horizon threatening to put an end to the economy’s smooth sailing:

  • Firstly, both the stability of the euro and the EU itself is uncertain. Depending on the outcome of this month’s elections in Greece, the question of whether Greece should or could remain in the eurozone arises anew. In addition, the UK government plans to hold a referendum on whether the country should leave the EU entirely.
  • Secondly, we are likely to see continued weaknesses in several key export markets, not only among Germany´s EU trading partners, but especially in Russia and the Ukraine. A potential collapse of the Russian economy threatens to have a significant negative impact on the financial services and industrial sectors in Germany. Additionally, after many years of double-digit growth the economy in China has been slowing down. Again, this is not good news for Germany´s exporters.
  • An economy depends critically the availability of labour. As mentioned above, Germany thrives based on its skilled labour force but the country is faced with demographic challenges as well. The population is ageing, early retirement is popular, and unless migration policies stimulate the influx of skilled workers from outside Germany, there will be a labour shortage in the years to come.

2015: Another Difficult Year?

This time last year, forecasts were predicting that Germany would enjoy growth of 2% in 2014. The end result fell short – indeed industrial output actually fell in both the second and third quarters. Nonetheless, Germany did not fall into recession and overall, the economy grew by 1.3% in 2014.

This bumpy ride over the past year has shaped consumer, corporate and investor expectations for 2015. Consumers ended 2014 in confident mood, thanks to Germany’s strong employment market (91% of those surveyed said they felt secure in their job). When asked, consumers expressed confidence that the German economy would continue to expand. More concretely, consumers spent more at Christmas: retail sales surged in the final weeks of the year, giving a strong impetus to 2015.

Corporates are cautiously optimistic for the year ahead. Large firms such as Deutsche Post, SAP, Siemens and Merck expect moderate growth, led by strong export performance particularly to the US. The automotive industry – Germany´s premier industry which boasts handling one-third of global automotive research and development – is even more upbeat. This confidence should lead to further increases in employment.

According to the Ifo-Institut, an economic research institute which publishes a periodic employment barometer, German companies intend to recruit more staff in 2015. These plans even extend to mid-sized companies: although they are not as optimistic as larger companies, about one in three of the mid-sized companies surveyed expects to recruit staff and increase investment in 2015 and beyond.

Investors continue to find Germany attractive, especially relative to other eurozone countries. The investor confidence index ended 2014 on a high note. Close to half of the investors surveyed expect that Germany will become an even more attractive business location, while only 13% expect it to deteriorate. However, nearly one in five survey respondents said that in order to keep attracting investors, Germany needs to focus on research, development, technology and innovation. This is the overriding priority, followed by education and training.

Outlook for 2015

So what are the forecasts for 2015 and beyond? In numeric terms, official estimates of growth range from 1% by the German government´s expert council (Sachverständigenrat) to 1.5% by the International Monetary Fund (IMF) and Organisation for Economic Cooperation and Development (OECD). Some private consultancies are a shade more bullish and forecast growth of 1.6%.

However, the ride ahead may well be bumpy and the relatively smooth sailing of recent years could be over. Yet on balance, the strengths of the German economy will allow it weather any storms that the dark clouds might contain.

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