Germany is weaker than it looks

The German economy appears to be firing on all cylinders. But under the surface lurk fundamental vulnerabilities that could hamper its long-term performance.

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.

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".

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Will a stronger euro ruin Europe's rally?
European stockmarkets

Will a stronger euro ruin Europe's rally?

International investors have been buying into European stocks, driving the euro higher. But that surge now risks dampening the recovery that started i…
21 Sep 2020
No deal is the best deal for Britain – and the EU too
Brexit

No deal is the best deal for Britain – and the EU too

Europe has a lot to gain from a thriving, independent Britain, says Matthew Lynn.
6 Sep 2020
Europe’s magic works better in the dark
EU Economy

Europe’s magic works better in the dark

Europe’s latest fiscal intervention looks like the kind of muddle-through that makes a United States of Europe more likely, says Merryn Somerset Webb.…
28 Aug 2020

Most Popular

Investors are shunning UK stocks – but they might regret that in a year’s time
UK stockmarkets

Investors are shunning UK stocks – but they might regret that in a year’s time

There are a number of reasons why investors aren't buying UK stocks, says John Stepek. But they may want to rethink that strategy.
29 Sep 2020
Are we really in a stockmarket bubble?
US stockmarkets

Are we really in a stockmarket bubble?

The rise of “cash shell” companies, sky-high valuations – everything seems to point to a stockmarket bubble. But all may not quite be as it appears, s…
28 Sep 2020
Two commodities that could lie at the heart of the next resources bubble
Energy

Two commodities that could lie at the heart of the next resources bubble

Commodities tend to move in cycles. And if you can identify early on which ones are about to surge in demand, you can profit handsomely. Dominic Frisb…
30 Sep 2020