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

  • Aging infrastructure, delay in fiber optic cable deployment
  • Demographic decline, partially offset by immigration
  • Highly dependent on world markets, especially Europe
  • Prominence of automotive and mechanical engineering industries
  • Persistent (but reducing) backwardness in Eastern Länder
  • Weak productivity of services
  • Shortage of engineers; insufficient continuing education
  • Low start-up activity and insufficient venture capital

Current Trends

Growth will be Lower in 2018

The exceptional performance of 2017 is unlikely to be repeated in 2018. The poor performance in the first quarter will only be partly offset by a recovery over the rest of the year. As a result, the economy is approaching potential growth estimated at around 1.5%.

Economic growth is mainly driven by domestic demand. Household consumption remains sustained. One of the key factors behind this dynamism is the strength of the labor market, which has seen increasing employment and strong wage growth. 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 the 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, with the unemployment rate set to continue its downward trend towards 5%. In addition, households are benefitting from an increase in family allowances, as well as the reduction in health insurance and pension contributions.

Despite the slowdown in growth in public consumption; due to the decline in the number of refugees received, public investment in social housing and infrastructure remains sustained and is accompanied by solid growth in the construction of private housing – although this latter is coming up against capacity saturation. Conversely, despite the high rate of production capacity utilization, business investment in equipment and buildings could slow due to uncertainties related to Brexit, Italy and the US government's trade policy, in addition to sanctions against Russia and higher energy prices. Exports, especially of capital goods, are likely to slow, while imports of consumer goods should remain supported by domestic demand. In addition, the contribution of foreign trade to growth should remain close to zero. In this context, German payment behavior is expected to remain generally good. The number of business failures is expected to fall slightly (3%, after a fall of more than 7% in 2017).

Public and External Accounts in Surplus

Despite a slight fiscal loosening against a background of lower social contributions and higher tax thresholds and family allowances for households, and increased investment expenditure on transport, energy and early childhood services, the government balance will continue to show a small surplus, thanks to the positive impact of buoyant activity on revenues. 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. 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, predominantly due to tourism. The income balance will likely remain in surplus, with the income generated by the considerable and growing investments abroad (thanks to recurring current account surpluses) being higher than remittances from immigrants and investors.

A New Grand Coalition, But More Fragile

After the September 2017 general elections, the Germans were faced with the longest negotiations to forming a new government since the Second World War. After the failure of talks between the Conservatives, the Liberals, and the Greens, discussions between the Conservatives (CDU-CSU) and the Social Democrats (SPD) led to the formation of a new Grand Coalition government in February on the basis of a 170-page contract. Nevertheless, the small majority of the Coalition parties in the Bundestag, as well as the breakthrough of the far-right (which prompted the right wing of the CDU and the Bavarian CSU to double down on immigration), weaken Chancellor Angela Merkel's position. The government will likely stick to the terms of the contract, particularly in terms of housing, education, family, and retirement, especially given that the contract includes clause for review after two years. Nevertheless, the healthy state of the budget offers significant room for maneuver.

Source:

Coface (07/2018)
Germany