It has a strong base in high-tech manufacturing. It has lots of world-leading small companies. Workers and managers work in harmony, its skills are world class, the banks lend for the long term, and it runs a massive trade surplus. Over the years, plenty of analysts have looked at the German economy, and wondered why the British, or the Americans, or the Spanish, or whoever, can’t be a bit more like the Germans. It has been a model of sustainable, solidly based prosperity and growth.
But there is something that few people have so far noticed. Germany is getting a lot more like the UK or the US. Instead of the rest of the world copying Germany, as they are often urged to do, it is becoming more like everyone else.
Creating jobs for migrants
You can see the change most clearly in the labour market. Germany has turned, alongside Britain, into the one country in Europe that can create jobs on a massive scale, and in the process unemployment has fallen to record lows – at just 3.6% it is at its lowest rate in 27 years. But dig into the figures and something interesting is going on. Over the last 12 months Germany created 754,670 new jobs, reckons High Frequency Economics, a US research firm, but unemployment only fell by 188,000. That is very similar to the trend in Britain in the last decade.
The explanation? The economy is creating lots of jobs – but most of them go to relatively low-skilled immigrants. Most of the Germans who want a job can get one, but the economy is now largely creating work for new migrants. Some of those are drawn from the million refugees Angela Merkel let into the country in 2015, but far more of them are eastern Europeans drawn by higher wages, or Italians and Greeks who cannot find work at home.
Germany has also seen a rapid rise in part-time jobs. These now account for nearly 30% of the total, up from a quarter before the crash of 2008, according to Pantheon Macroeconomics, a research consultancy. The big growth has come in finance and leisure. Lots of people working part time in bars and restaurants? Does that remind you of anywhere? The UK perhaps?
Meanwhile, retail sales are starting to boom. They have been growing by more than 3% annually in the last year, while wages are relatively stagnant – average earnings have been growing by less than 2%. So people are increasingly spending money they don’t have. Again, that sounds familiar. Even house prices have been racing ahead. Property is up by 25% over the last two years, with major cities such as Berlin and Munich witnessing an even more rapid acceleration of prices.
Years of near-zero interest rates and lots of easy money from the European Central bank due to its quantitative easing programme have finally convinced a nation of renters that property speculation isn’t so bad. The Germany of skilled craftsmen and apprentices making machine tools for export is increasingly becoming a myth.
Heading for turbulence
There’s nothing necessarily wrong with change. A more consumer-driven, services-based model is probably going to be stronger heading into the 2020s than one focused mainly on manufacturing. Investors can expect German assets to do well. In property, they already have and that’s spilling over into the Dax stock index as well. At 13,500 it’s hitting all-time highs and is at almost double its 2000 peak (unlike the FTSE, which has only just past that level).
But as we found out in the UK, the mix of stagnant real wages, less secure work, and high levels of immigration can prove politically toxic. We’re already seeing rising support for the populist Alternative for Germany party. The country’s politics are heading for turbulence.