Country Risk Rating

A1
The political and economic situation is very good. A quality business environment has a positive influence on corporate payment behavior. Corporate default probability is very low on average. - Source: Coface

Business Climate Rating

A1
The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.

Strengths

  • Solid industrial base (more than 20% of GDP)
  • Low structural unemployment; well-developed apprenticeship system
  • Geographic diversification of exports
  • Strong competitiveness
  • Importance of family-owned exporting SMEs (Mittelstand)
  • Integration of Central and Eastern Europe in production process
  • Importance of the ports of Hamburg, Bremerhaven and Kiel
  • Institutional system promoting representativeness and consensus

Weaknesses

  • Ageing infrastructure
  • Demographic decline, partially offset by immigration
  • Shortage of engineers and venture capital
  • Highly dependent on world, especially European, markets
  • Prominence of automotive and mechanical engineering industries
  • Persistent but reducing backwardness in Eastern Länder
  • Weak productivity of services
  • Low start-up activity

Current Trends

Dynamic Growth Will Continue in 2018

The German economy had a very good year in 2017, and the outlook remains positive for 2018. Economic growth is expected to remain above estimates for potential growth (approximately 1.5%). As a consequence, Germany is expected to experience an upswing for the ninth consecutive year. Economic growth is especially driven by internal demand.

One of the key factors to this success is the strength of the labor market, which has seen increasing employment and dynamic gains in incomes. In late 2017, the amount of open positions stood at 1.1 million: an all-time high. Labor demand is especially high in the trade, education, and health sectors, accompanied by high levels of demand in manufacturing industries and for part-time workers. Therefore, by the end of 2018, the threshold of 45 million people in employment could be reached for the first time ever, with the unemployment rate set to continue its downward trend towards 5%. In addition to this, export growth picked up in 2017 and will likely remain dynamic in 2018 as well, due to the broad-based upswing in the world economy.

Growth in public consumption will likely slow with a drop in the number of refugees taken in, but public investment in social housing and infrastructure will probably continue, accompanied by a probable strong growth in the construction of private homes. In contrast, business investment in equipment and buildings is set to pick up very gradually, despite the high rate of production capacity utilization, against a background of continued uncertainties, especially from the external environment (e.g. Brexit, because the UK is among Germany’s top-five trade partners). Given the much stronger import growth linked to lively domestic demand and the stabilization of trade terms, trade’s contribution to growth is expected to be close to zero. In this environment, German businesses’ payment behavior will likely remain generally good. The number of insolvencies is expected to fall by about 5% (after a drop of more than 7% in 2017).

Public and External Accounts in Surplus

Despite slight fiscal loosening against a background of expected tax relief for households, higher pension obligations, and higher spending on transport, energy and early childhood services, the public balance will continue to show a small surplus, due to ongoing strong growth in taxes and social contributions. The maintenance of a significant primary surplus (i.e. excluding debt interest) and of a positive differential between growth and the average interest rate should result in another reduction in the debt burden. Although slightly lower, the current account balance is set to remain broadly in surplus thanks to a massive trade surplus. The balance of services traditionally posts a deficit, especially due to tourism. The income balance is expected to remain in surplus with income from investments abroad, which are increasing due to recurring current surpluses, exceeding remittances sent overseas by emigrants and investors.

Political Uncertainty  

After general elections in September 2017, the Germans have been faced with the longest negotiations to forming a new government since the Second World War (WWII). After the failure of exploratory talks between the two conservative parties – the Liberal Party, and the Green Party – new talks began at the start of 2018 between the Conservatives and the Social-Democrats to again form a Grand Coalition. If inconclusive, new elections could take place in the spring. The weak election results of the conservative parties and widespread political tendencies in the new parliament have significantly weakened Chancellor Angela Merkel’s position. Far-reaching reforms, also in the area of economic policy, are unlikely to take place, as room for consensus-building will be contained – even after new elections. Due to sound public finances, there is some room for tax relief and higher expenditures. Nevertheless, the next government – which could even be a minority one for the first time in Germany’s history after WWII – could be quite fragile.

Source:

Coface (01/2018)
Germany