Germany is weaker than it looks

published 19 January 2018

879_MW_P06_Markets_Bottom — Merkel: predictable no longer

The German economy is firing on all cylinders. It expanded by 2.2% in 2017, the fastest pace in six years and eighth successive year of growth. Business confidence and employment are both at record highs. The government budget was in surplus for the fourth year in a row last year, by 1.2%.

Beneath the surface, however, there are several "fundamental vulnerabilities" likely to hamper its long-term performance, as Olaf Storbeck points out in the Financial Times. One key problem is the rapidly ageing population; only Japan's is getting older faster. The workforce is set to shrink and "employers are already complaining about a shortage of skilled labour".

Meanwhile, Germany has the lowest infrastructure investment rate of any large developed country, says The Economist. Tales abound of "leaky classrooms and potholed roads"; a railway route across the Danish border had to be closed early last year owing to a rotting bridge. In the World Economic Forum's global competitiveness survey in 2010-2011, Germany ranked fifth for both road and railway quality. By 2016-2017, it had slipped to 16th and 11th respectively.

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Unfortunately the government may not fix the roof while the sun is shining, says Swaha Pattanaik on Breakingviews. Overflowing state coffers "are an invitation for the politically weakened" chancellor, Angela Merkel, to "spend her way to a coalition deal" with the Social Democrats. A "grand coalition" with the Social Democrats would rest on a lower combined vote share than ever before, says Tony Barber, also in the Financial Times, and it will be hemmed in by populists on both sides of the political spectrum. This is another factor for investors to keep in mind: German politics appears to be "shedding its reputation for being predictable".

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.