Germany: Risk Assessment
Country Risk Rating
Business Climate Rating
- Strong industrial base (25% of GDP, 2018)
- Low structural unemployment; well-developed apprenticeship system
- Importance of family-owned exporting SMEs (Mittelstand)
- Relatively low private household debt (95% of disposable income, 2018)
- Importance of the ports of Hamburg, Bremerhaven and Kiel
- Institutional system promoting representativeness
- Declining working population from 2020 onwards, despite immigration
- Low bank profitability
- Prominence of the automotive and mechanical industries, particularly in exports (32% of GDP in 2018)
- Capacity constraints, insufficient investment (especially in internet accessibility) and venture capital limit productivity gains
- Eastern Länder still lagging behind, although the gap is closing
- Splitting political party system, which the Germans are not used to
Industrial recession but strong private consumption
The German industry has been in a recession in 2019. Production numbers in a yearly comparison have been almost constantly negative since August 2018 at least until the end of 2019. New orders and several sentiment indicators for the manufacturing sector do not suggest a strong recovery in 2020. The reason for this are numerous. The trade conflict between the United States and China as well as uncertainties related to the Brexit are keeping the uncertainty high, affecting the willingness to invest (equipment investments are 11% of GDP) and are weighing on exporting companies. Lower demand from the main trading partners the United States and China, due to the “soft landing” of its economic growth, are weighing on the German export business (50% of GDP). Both factors should keep on in 2020. In addition, the German car sector continues to struggle with the aftermaths of the Diesel-scandal (including driving bans in some city centers), cyclical factors and the technical transformation towards new driving technology. This has effects on all supply-chain industries like the metal/machinery and the chemical industry. In addition, the climate change with the hot summers of the last years are weighing on the agriculture-sector as well as on the industry with higher energy costs. Since investment goods are the main share of German exports, net exports were negative in the third quarter of 2019. However, private consumption (53% of GDP) is still strong, supported by a very tight labor market (unemployment rate with 4.8% in October 2019 on the lowest level since the reunion), a robust wage growth and very low interest rate environment, due to a negative deposit rate of the ECB. Together with a moderate public spending (14% of GDP) and a still vivid construction sector (11% of GDP), private consumption is keeping the German economy in a balance. A major change of this situation is not expected in 2020. The global uncertainty factors will keep on. In general, the German economy should get used to this new status quo of higher insecurity. Therefore, a limited recovery in trading activity is expected. Private consumption should be the main column of the German economy, as long as the weakness of the industry sector will not jump over to the service sector (some corporate-near services were already affected in the second half of 2019) and the unemployment remains at a robust level. The ECB should foster consumption, as it will be still ultra-expansive in 2020, while inflation should remain close to 2019 level. Together GDP growth should remain stable (with calendar effects the GDP growth rate should reach 0.9%, as there are more working days in 2020 compared to 2019).
Public and external surpluses are shrinking
The government plans record investments with €39.8 billion (1.2% of GDP) in 2020. They should mainly support education, the structural change of the withdrawal from lignite mining, environmental protection and the defense sector. Since at the same time the tax revenues should be more modest, the public surplus will shrink. The same is true for the current account surplus, which is expected to diminish further in line with the trade surplus (6% of GDP). The balance of services should remain in deficit due to notably spending by German tourists, while the income balance will remain in surplus as the foreign investments are still increasing quite strong due to the low interest rate environment in Germany.
Grand Coalition under pressure
Following the parliamentary elections of September 2017, a coalition negotiation between the Conservatives (CDU-CSU), the Greens and the Liberals (FDP) failed, so that in the end, under a lot of protest from the party basis of the SPD, the Conservatives and the Social Democrats (SPD) formed the third Grand Coalition under the leadership of Chancellor Angela Merkel (CDU). The half-heartness of the SPD in the Coalition resumed, with two party leaders stepping down since the beginning of 2018. The new SPD leader-duo Norbert Walter-Borjans and Saskia Esken, two left-wing Social democrats tend to leave the Grand Coalition (only possible with the approval of the SPD parliamentary group in the Bundestag). In that case, Merkel could build a minority government until the end of the current term in autumn 2021, she could try again with the coalition CDU-CSU, Greens and FDP or call a new election. Polls show that in a new election, two-party coalitions, even the current one, would not have enough votes, only a three party coalition will have enough support. As no party wants to work with the right-conservative AfD, the formation of new coalitions will get very difficult, as minority governments are uncommon in Germany.