Feeling the global challenge
When I think of the German economy I do not know if I should say that the glass is half full or half empty. But it opens up for the choice between painting a rosy picture of the economic outlook, or the opposite. Though for an economy with such a strong history and background, it is not ambitious enough with a glass that is just half full. Everyone knows that Germany’s economy is robust but robustness alone is not enough given the current global economic conditions. The global economy is under pressure and it changes quite quickly for several reasons. Last year almost all economists forecasted that Germany would generate a higher GDP growth in 2016 compared to 2015. The argument that I noticed was exactly that the German economy would benefit from the country’s traditional strong status and a general improvement in the global economy.
A SILICON VALLEY IS MISSING
Since long I have disagreed with this optimism as world trade and the global economy is facing headwinds for a while. At the same time, there are simply no signs that business investment jumps forward anywhere in the world. The consequence now emerges as a challenge for German exports and the country’s machinery industry. The pressure became evident in February when the new factory orders fell by 1.2 pct. compared to January. I always take monthly swings with caution but looking at the trend for new orders in the period from November to February, there has also been a subdued development during these months. In my view, there is clear pressure on a number of the classic growth engines in the German economy – precisely these that many economists leaned their optimism towards.
That the global economy changes direction one should not be deterred by, on the contrary, it opens opportunities. The future winners are the countries with an economy adapted to partially different consumption demands. Most consumers around the world will always like to drive a German car, and of course, does this desire contribute to the stability of German exports. But new consumption around the world has a different characteristic. As an example does the total global household spending on downloaded or streamed music increase more than the sales of traditional CD music is dropping. The challenge is obviously because the reduced CD production costs more jobs than an electronic blip sent out from somewhere in the world generates new jobs.
In assessing the attractiveness of Germany as a destination for additional investment and how the future for the growth engine looks like, I think it’s a big deficit that Germany lacks a “Silicon Valley”. In Berlin, there are indeed clusters of start-up companies within the technology, media, etc. but it is after all modest. Germany lacks technology, software, or what I call “smart” companies which are in the “unicorn” league (venture capital financed companies that are estimated to be worth at least $ 1 billion). This focus should not be to satisfy investors who are looking for new investment opportunities, but it describes dynamic Germany needs to maintain its leading status among the large global economies.
THE DANGEROUS PROPERTY MARKET
The German economy certainly has some upbeat developments that are related to domestic demand. The European Central Bank’s very expansive monetary policy is too expansionary for the German economy, so there is a never-ending flow of capital into the property market. Graphic one shows the annual changes in orders in the construction sector which seemed to explode in the first quarter. This winter was mild so the normal weather-related decline in construction activity was not outspoken like in a normal winter. Despite these statistical fluctuations, it worries me that the construction sector is such a significant growth engine in the German economy. The German central bank Bundesbank is clearly not happy about this development, as a property market is a classical place for asset bubbles to grow fast.
The biggest bright spot in the German economy is though and will remain, private consumption which is very positive in my view. I argue that the countries with the best chance to overcome the coming years with low global economic growth are economies with strong domestic consumption, and preferably in the private sector. As graphic two shows, the consumer has currently found a confidence level at around 9.5 and well above the historical average of 5.5. The majority of the surveyed households are concerned about the outlook for the export sector but their own household economic capacity is assessed to be fairly strong. The appetite to increase consumption is also particularly strong and these individual circumstances I weigh as particularly positive for growth in Germany.
Despite the upbeat factors for the German domestic economy then the real estate sector worries me. Directly negative I find the static situation in the export sector and the machinery business. Further is the lack of companies in emerging, smart and new sectors pulling down my outlook. Over the past three to four months I have changed my assessment of Germany even more in the direction of “less attractive”. I maintain the opinion that Germany will not be able to fulfill the general growth expectations this year – to put it another way, the glass is half empty…
