Country of the month: Germany

Germany is the European Union’s economic powerhouse. The country has had 16 consecutive quarters of GDP growth—its longest upswing since 1991—and is enjoying its lowest unemployment rate since reunification in 1990.

Germany’s solid growth has continued this year despite political challenges to Chancellor Angela Merkel’s leadership, with more jobs and higher wages driving consumer spending. But trade tensions and an aging population are potential headwinds.

Germany is the world’s third leading exporter (see Table 1), with autos, machinery and equipment, and chemicals and chemical products its top exports. Its total exports increased by 6.2% from 2016 to 2017, Germany’s Federal Statistical Office reports, and were up 3.9% in the first half of 2018 compared to the same period last year.

Germany has a competitive advantage when it comes to exports since the common European currency is tied to the union’s weaker countries, devaluing the euro, says Ome Saidi, vice-president, investment management and a portfolio manager for the global equity and income team at Mackenzie Investments.

Table 1: The world’s top exporters

Country	Value of 2017 exports of goods (USD)
China	$2.23 trillion
U.S.	$1.55 trillion
Germany	$1.49 trillion

Sources: U.S. Census Bureau, China’s Ministry of Commerce, Germany’s Federal Statistical Office

Threats from trade tensions

Talking about trade means talking about potential trade wars, says Carsten Brzeski, chief economist at ING Germany.

Trade tensions between the U.S. and the EU spilled over into action on June 1 when the U.S. imposed tariffs of 25% on steel and 10% on aluminum. The U.S. Census Bureau found the trade deficit with Germany was $66.7 billion in 2017.

In response, the EU imposed tariffs on a number of imports from the U.S., including bourbon, peanut butter and orange juice.

“If you have an economy that’s as exposed to global trade as Germany, it will definitely dampen growth,” says Martin Lueck, chief investment strategist for Germany, Austria and Eastern Europe at BlackRock.

More recently, the U.S. threatened to impose tariffs on imports of cars from China and the EU. Germany exported 493,643 cars to the U.S. in 2017, according to the German Association of the Automotive Industry.

A July meeting between President Donald Trump and European Commission President Jean-Paul Juncker put the auto tariffs on hold and raised the possibility of decreasing tensions.

China, however, responded to U.S. threats by announcing it would impose tariffs on cars imported from the U.S. This would leave Germany’s auto sector vulnerable, given that German auto companies export more from the U.S. into China than any American car manufacturer, wrote Brzeski in a July blog post for ING.

Daimler-owned Mercedes-Benz U.S. International exports more than 70% of the SUVs made in its Alabama plant and is the second largest auto exporter in the U.S., the company says. BMW also has factories in the southern U.S.

Brzeski says any tariffs on the imports of German luxury cars would be manageable, though.

“People already pay such a high price that buyers of luxury cars would probably bear it if a Mercedes goes from $100,000 to $125,000,” he says.

Rise in domestic consumption

As German exports are threatened, domestic consumption is on the rise. Household final consumption expenditure rose by a price-adjusted 2% in 2017, year over year, according to the Federal Statistical Office, and continued to spur growth in the first half of this year.

Domestic demand will be “a major force” behind GDP growth this year, Lueck says.

“It’s less of a contributor to GDP growth than in the U.S., where it’s about 70%. In Germany it’s 56%,” he says.

Wage growth is driving consumption, says Lueck. He forecasts that wages will rise about 2.5% this year, which is more than in previous years. Real wages rose by 0.8% last year and nominal wages rose by 2.5%, the statistical office reported.

Germany’s low unemployment rate is also contributing to spending. In May, the country reported a seasonally adjusted unemployment rate of 3.4%, a decrease of 0.2% from the same month last year.

The European Central Bank’s fixed rate remains at zero, which means Germans aren’t benefiting from savings accounts, says Brzeski, and they’re either spending their money or investing in real estate. Home ownership rates have increased in the last five years, he says.

Companies in the home improvement sector are benefiting from increased spending on renovations, Lueck says.

“Usually what happens is that if you have an economy that is doing well on the consumer side and, on top of that, you have a real estate market that is booming, that usually benefits DIY companies as well,” he says.

Brzeski is forecasting the German economy will grow by 2% year over year in each of the next two years.

While low unemployment and rising wages contribute to domestic consumption, Germany’s aging population adds to a shortage of skilled labour. The IMF forecasts a shrinking German labour force beginning in 2020.

“Aging means slower growth, a higher preference of society for lower inflation, for little debt and for low interest rates,” Brzeski says. “It’s one of the long-term challenges for the economy.”

Bonds and interest rates

ING Germany chief economist Carsten Brzeski says the end of the ECB’s quantitative easing (QE) program is unlikely to affect the German economy. He expects the yield on the 10-year German bund will be between 0.7% and 0.8% by the end of this year, and perhaps rise to 1.2% in 2019.

“Our expectation is that the 10-year bund yield will only go up slightly on the ECB stopping QE,” he says.

RBC is forecasting the yield on 10-year German bunds will be 0.75% in May 2019. The bund market remains expensive, the bank’s summer 2018 outlook report says, and RBC is maintaining a 5% underweight position.

The basics

Official name: Federal Republic of Germany

Capital: Berlin

Government type: federal parliamentary republic

Population: 80.6 million

Head of government: Chancellor Angela Merkel (since November 2005)

Currency: euro (US$1.16 on Sept. 6)

Citizenship: at least one parent must be a German citizen or a resident alien who has lived in Germany at least eight years

Sources: CIA World Factbook, Bloomberg

Economy

GDP (purchasing power parity): US$4.15 trillion (estimated for 2017)

GDP growth: 2.2% (2017)

Inflation rate (June 2018): 2.1%

GDP per capita: US$50,649

Unemployment rate (May 2018): 3.4% (seasonally adjusted rate)

GDP by sector

Agriculture: 0.6%

Industry: 30.1%

Services: 69.3%

Sources: CIA World Factbook, Deutsche Bundesbank, OECD, German Federal Statistical Office

Taxation

Corporate

Income tax rate: 15%

Branch tax rate: 15%

Capital gains tax rate: 15%

Multiple real estate tax, major cities: 1.5% to 3% of assessed value

Personal

Income tax: Progressive up to 45% (47.475% including the solidarity surcharge)

Capital gains: 25% in most cases, when gains exceed Germany’s “saver’s allowance” of €801

Inheritance or gift tax: 7% to 50%

Source: Deloitte’s Taxation and Investment in Germany 2017