Germany: economic miracle or mirage?

Everyone is used to thinking of Germany as the eurozone’s powerhouse. But it may not be for much longer.

Everyone is used to thinking of Germany as the eurozone's powerhouse. But it may not be for much longer, says David Charter in The Times. Growth last year was a "solid but unspectacular" 1.7%, and this year forecasters expect 1.4%. A slowdown in China and emerging markets has undermined activity in the crucial export sector. Machinery sales to China fell by 6% last year. Selling more to slower-growing Europe and the US is unlikely to plug the gap.

Meanwhile, consumption, which has been driving growth recently, could be weakened by lower wages, which have started to fall in line with low inflation.

The longer-term outlook isn't very encouraging either. The ageing population implies a rapidly shrinking workforce: around six million workers will be lost over the next 15 years, Chancellor Angela Merkel warned last year. The demographics suggest Germany's potential growth rate could fall to 1% in a decade, according to a 2014 OECD report. That makes boosting productivity all the more important, but in this respect Germany is going backwards.

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It urgently needs to boost capital investment, which has been falling as a share of GDP since the 1960s and has been below the European average since 2001, says This is starting to show: infrastructure is in dire need of an overhaul. According to a report in 2013, 20% of the 67,000 bridges owned by local authorities need repairing or complete replacement. Education spending is also falling behind. Germany's top-rated university is around number 50 in the global rankings.

An easy way to bolster productivity would be to liberalise the overregulated and sleepy services sector. But as anyone who has ever tried to shop in Germany on a Sunday will appreciate, there is little sign of change on this front. Given all this, Merkel's "economic miracle", as Charter puts it, "is beginning to look like a mirage".

The Philippines will keep on thriving

He has overseen a decline in corruption and a peace deal with Islamic insurgents in the south. He continued his predecessors' gradual reduction in public debt, now down to 45% of GDP from over 65% in 2003. Lower interest payments have freed up money to spend on education and infrastructure. All this is why GDP growth has averaged 6.3% a year since 2010, 1.8% more than in the previous five years. The country is one of the region's success stories.

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.