Germany: Risk Assessment
Country Risk Rating
Business Climate Rating
- Strong industrial base (24% of GDP, 2021)
- Low structural unemployment; well-developed apprenticeship system
- Importance of family-owned exporting SMEs (Mittelstand)
- Resilient private household debt (99% of net disposable income, 57.6% of GDI, 2020)
- Consensus orientated politics, institutional system promoting representativeness
- Declining working population from 2020 onwards, despite immigration
- Low bank profitability
- Strong dependence on international energy imports (e.g. 39% of all German gas imports come from Russia)
- Prominence of the automotive and mechanical industries, particularly in exports (30% of total exports in 2020)
- Capacity constraints, insufficient investment (especially in internet accessibility) , and venture capital limit productivity gains
War in Ukraine leads to surging inflation and thwarts the economic recovery
The war in Ukraine, and the resulting EU sanctions against Russia and Belarus, substantially changed the outlook for the German economy in 2022. Although direct trade with Russia, Ukraine, and Belarus is very limited (e.g., Russia is the 15th biggest trade partner of Germany, with a share of 2.3% of total goods trade in 2021), the consequences are substantial due to disruptions in the supply chain (such as in the chemicals and automotive sectors, which together account for around 6.5% of GDP) and in energy imports. As a complete stoppage of energy imports from Russia and Belarus is not expected, the main impact is caused by surging energy prices, with oil prices shooting up by 52% and natural gas prices by 55% between the beginning of 2022 and early April. Besides higher energy prices, further disruptions in the supply chain and higher food prices led to a record-high increase in producer prices (the highest since 1949), which translated into a consumer price inflation rate of 7.3% in March 2022. This is the highest level since autumn 1981, in the aftermath of the second oil-price shock. While inflationary pressures should decrease slowly in the year’s second half, they should remain high, far above the 2% target of the ECB. Higher wage agreements with the unions should further push inflation and increase the minimum wage from 9.82 euros per hour to 10.45 euros in July 2022 and 12 euros in October 2022. Nominal wages should increase by 2.5% this year and an additional 4.4% in 2023, which could support higher inflation. The ECB is slowly reacting to this strong inflation dynamic. The central bank stopped the Pandemic Emergency Purchase Program in March and could end all QE purchases in Q3 2022. A first increase in the deposit rate is expected towards the end of the year. However, the central bankers will probably be cautious with rate hikes, as they want to calm down financial markets and keep yields of European bonds low. Due to the high inflation dynamics, the purchasing power of households will decrease noticeably. However, at least at the beginning of the year, the increased savings that bulked up during the last two years of the pandemic will buffer some of it. Nevertheless, consumption should decline in the first half of the year. Private investments should decrease, too, due to the supply chain disruptions and sanctions, but also because of the high uncertainty regarding the development of the war. The public sector will support growth via higher military investments, energy subsidies to decrease the effect of surging energy costs (e.g., a subsidy for households to buy fuels for three months and a 300 Euro one-off payment for every home), and further support for companies still dealing with COVID-related measures. This comes in addition to the announced public structural investments of EUR 51.8 billion (1.4% of GDP) in 2022. While we expect only minimal growth over the rest of the year, it will be highly dependent on the further development of the COVID-19 pandemic and possible new mutations.
A public deficit for the third consecutive year, albeit receding
Even including the new state support measures, expenditures should stay the same compared to the previous years, while tax receipts are expected to be higher in 2022. This will improve public balance, but the deficit will remain for the third consecutive year. Thanks to low-interest rates, the public debt ratio should remain stable. Germany’s current account surplus should fall. Due to new supply-chain disruptions, export growth should decelerate, while nominal imports could increase due to higher import prices. In addition, the services balance could slowly become a slight deficit again after global travel restrictions progressively ease. At the same time, the harmony of investment income (surplus) and the balance of current transfers (deficit) should see only cosmetic changes.
The first three-party-governing coalition in German history
In September 2021, the social-democratic SPD won the parliamentary election with 25.7% of the votes, just ahead of the Christian-democratic CDU/CSU with 24.1%. The environmentalist Greens came in third (14.8%), followed by the liberal FDP (11.5%), the right-national AfD (10.3%), and the Left (4.9%). SPD, Greens, and FDP formed in December 2021 the very first three-party coalition on the federal level under the leadership of the new chancellor Olaf Scholz (SPD). The war in Ukraine forced a shift in some political areas, often in direct contrast to the ideology of the coalition parties. The Green party, which developed from the peace movement in the 1980s, supported an investment package worth EUR 100 billion for the military. Furthermore, the economic minister Habeck (Greens) visited countries in the Middle East (like Qatar) to order more gas for Germany. Conversely, the liberal Finance Minister Lindner (FDP) announced more support programs for the population to cope with higher energy prices via increasing public debt. Nevertheless, as all parties aim for a pragmatic political style, the coalition seems stable and should hold until the next election in September 2025.