This does not need to be reduced through a slowdown in exports, but rather through stronger growth in consumer spending. Nevertheless, German consumers remain cautious as ever and continue to waste large portions of their income.
In any case, weak overall demand is not the real problem. There are some underlying factors that cause concern. First of all, the working-age population is declining. In the past, this has been mitigated by a significant fall in unemployment and an increase in female employment rates.
With unemployment currently at around 3%, there is little scope for further increases. Female labor force participation is also likely to have reached its peak.
Of course, as in other European countries, including us, it would be possible to solve this problem by importing workers from abroad. But this does not seem to be politically sustainable, especially given the rise of the right-wing AfD.
Demographics are not everything and one can imagine an increase in productivity growth offsetting a decline in the labor force. But that doesn't look likely either.
In this country we are used to admiring the structure of the German economy, with its wonderful success in export markets and its strong concentration on manufacturing, which still accounts for around 20 percent of GDP, compared to just 9 percent in the UK.
Its performance was highlighted in the years immediately following the introduction of the euro in 1999, when there were widespread fears that Germany would face a competitive problem with other euro members. In fact, the exact opposite happened.
Internal devaluation occurred in Germany, with domestic costs reduced through widespread wage restraint. The result was a huge trade surplus with Germany's euro members and the rest of the world.
For all the wonders of the German corporate sector, Germany is far from the most dynamic or entrepreneurial economy. It is weak in all digital respects and has only a small artificial intelligence industry. Furthermore, since the benefits of AI will impact all economies in the coming years, it is likely that Germany will not be among the countries best placed to benefit.
It would be wrong to write off Germany. There are too many underlying strengths to justify such a judgment. And we've been here before. After reunification, Germany was widely ridiculed as the sick man of Europe. But it soon recovered. However, a repeat of such a resurgence does not seem at all likely.
This has both economic and political consequences. I assume that German economic growth will probably not be much more than about 0.5 percent per year over the rest of this decade. The weak economic growth in Germany will make the situation more difficult for its trading partners.
More importantly, at the political level, the underlying economic difficulties are likely to make Germany reluctant to take a leadership role in Europe or to support closer European Union integration.
Roger Bootle is a senior independent advisor to Capital Economics. [email protected]
Comments are closed.