Germany: Risk Assessment
Country Risk Rating
Business Climate Rating
- Strong industrial base (more than 30% of GDP)
- Low structural unemployment; well-developed apprenticeship system
- Importance of family-owned exporting SMEs (Mittelstand)
- Integration of Central and Eastern Europe in the production process
- Importance of the ports of Hamburg, Bremerhaven and Kiel
- Institutional system promoting representativeness
- Declining working population from 2020 onwards, despite immigration
- Early childhood care and post-primary school activities are still insufficient
- Low bank profitability
- Prominence of the automotive and mechanical industries, particularly in exports (48% of GDP)
- Eastern Länder still lagging behind, although the gap is closing
- Capacity constraints, insufficient investment and venture capital limit productivity gains
Growth will remain close to potential in 2019
Activity decelerated sharply in 2018, to the point of falling slightly in the third quarter. Exports had to cope with softer global demand and the impact of the US-China trade dispute, while automotive production was down nearly 10% in the third quarter compared with the previous quarter (before rebounding) due to delays in certifying vehicles under the new global emission standards that came into force on September 1, 2018. Accordingly, growth reverted to the economy's potential rate of expansion and is expected to remain at that level in 2019. Trade is set to make a negative contribution to trade again, with imports outpacing exports in line with brisk domestic demand. The imposition of a tax by the United States would affect German car exports to the United States (0.9% of GDP). On the domestic side, household consumption (53% of GDP) is poised to benefit from wage growth and an accommodative fiscal policy. Wages are driven by the low level of unemployment (3% expected, 6% among young people), the increase in the number of job vacancies (1.9% of total employment at the end of 2018) and the reduction in the number of immigrants whose employability is below that of the overall labour force. In accordance with the government’s coalition agreement, pensions for mothers will go up again, as will benefits for dependent children, with, in particular, the introduction of the Baukindergeld, a subsidy based on the number of children and designed to help parents buy a home. The tax threshold will also be raised, while social contributions are to be further reduced. Together, these measures would represent 0.6% of GDP. Nevertheless, the increase in real disposable income will be limited by the inflation generated by low spare capacity and its corollary, higher labour costs. This expansionary fiscal stance will also extend to public spending on early childhood care, primary education, refugee integration, broadband, infrastructure, and social housing, since public investment has fallen to a low level. Conversely, private investment (17% of GDP) will be less vigorous, despite the low cost of financing and the high level of capacity utilisation. Faced with international uncertainties (trade disputes with consequences for the value chains in which the country is highly involved, Brexit, sanctions against Russia, concerns about several major emerging economies), confidence has waned among business leaders since peaking at the end of 2017. Housing construction is facing capacity saturation, particularly at the labour level.
In this context, the payment behaviour of German companies is expected to remain generally good. As a result of high profits, as well as dividend and investment moderation, their debt has fallen to a low level. The number of corporate insolvencies, at its lowest level since 1999, is expected to decline only slightly at best.
Public and external accounts showing a surplus
Despite slight fiscal easing, the government balance is expected to continue to show a small surplus, due to the positive impact of buoyant activity on revenues. Likewise, revenues will benefit from the increase in environmental taxes. In addition, debt servicing, which is set to fall below 60% of GDP, is costing less and less (1% of GDP). The current account surplus is expected to shrink further in line with the trade surplus (7% of GDP). The balance of services shows a small deficit, due notably to spending by German tourists. The income balance will remain in surplus: the income generated by the country’s considerable foreign investments, which continue to grow on recurring current account surpluses, exceeds outgoing remittances by immigrants and investors. The country has a net creditor position vis-à-vis the rest of the world equal to 60% of GDP.
A fragile Grand Coalition
Following the parliamentary elections of September 2017, negotiations resulted in a renewed Grand Coalition government in February 2018, bringing together Conservatives (CDU-CSU) and Social Democrats (SPD), based on a 170-page agreement. Already under pressure because of her narrow majority in the Bundestag and the breakthrough of the far right (AfD), which has pushed the right wing of the CDU and the Bavarian CSU to up the ante, Chancellor Angela Merkel saw her position weakened by the poor results of the coalition parties in several regional elections and by excellent showings for the Greens and the AfD. She resigned as CDU leader in December 2018, but intends to see her term out, i.e. until 2021. Much will depend on the upcoming regional and European elections, the SPD's attitude when reviewing the coalition agreement at the end of 2019 and the stance of the new CDU presidency. The choice of Annegret Kramp-Karrenbauer, a centrist reputed to be close to the Chancellor, as head of the CDU, reflects a preference for continuity and an eye to the future, including a possible alliance with the Greens if the SPD withdraws from the coalition.