Germany’s massive current account surplus is usually blamed on a penny-pinching government obsessed with balanced budgets and frugal households hoarding cash. Yet the main culprit is German business.
The companies in the eurozone’s largest economy invest too little and save too much, according to economists who have identified rising corporate net saving as a significant factor behind the rise in Germany’s external surplus.
“Firms are very profitable but they are not using those profits to either invest, or pay significantly higher wages, or distribute dividends,” said Julie Kozack, an expert on Germany at the IMF.
Germany is widely admired as an export-driven, high-tech success story. But its large current account surplus has become a serious irritant to its trading partners, particularly US President Donald Trump who cites it as evidence of how America has been “ripped off . . . for years on trade” by its supposed allies. For months he threatened swingeing import tariffs on German cars as a means of righting the perceived imbalance.
While their rhetoric might be less belligerent than Mr Trump’s, international institutions such as the IMF and European Commission share his dim view of the German surplus. Maurice Obstfeld, the IMF’s chief economist, has warned of a “medium-term threat to global financial stability” if the imbalances of high-surplus countries such as Germany and the Netherlands were to continue to grow.
Meanwhile, Berlin’s “at best timid measures” to address the problem only increased the “risk of disruption through currency and asset price adjustments in indebted countries, to everyone’s detriment”, he wrote this month in Die Welt.
Germany’s current account surplus last year stood at $296.4bn — equivalent to 8 per cent of its economic output and 0.4 per cent of global gross domestic product. The Munich-based Ifo Institute said this week it would reach $300bn this year, making it the world’s largest for the third year in a row.
Germany’s economics ministry says it can do little. It says the surplus is the “result of market-based decisions on supply and demand by companies and private consumers on world markets” — a function of factors the government cannot control, including the oil price, the euro exchange rate and the relative quality of German products.
It also makes the point that the government has vastly increased public investment in roads, schools and digital infrastructure. Thanks to this and other measures, it says the current account surplus is set to fall from a peak of 8.5 per cent of GDP in 2015 to 7.5 per cent next year.
Yet that is not being mirrored in the corporate sector. While German companies are continuing to invest abroad, especially in fast-growing Asian markets, they are reluctant to put their cash to work at home: business investment in Germany declined from around 13 per cent of GDP in the 1990s to 11 per cent in recent years, according to the IMF.
“The real profits being generated by the German corporate sector are not being reinvested in terms of [capital expenditure] or other forms of physical investment within Germany,” said Huw Pill, chief European economist at Goldman Sachs.
Until recently, corporate saving made sense. Companies that emerged from the global financial crisis with huge debts needed to repair their balance sheets.
Yet this behaviour did not change even as the German economy began to recover and enter its long boom. The situation was not helped by a decline in dividend payout rates, particularly among small and medium-sized firms, according to the IMF — although there is evidence that over recent months, dividends have been ticking up again.
The phenomenon is puzzling. “It is hard to see why corporates are not investing more if they are so successful, and parking their savings in a bank account where they earn a negative rate of return,” said Marcel Fratzscher, director of the DIW think-tank.
The reasons could lie in Germany’s chronic shortage of skilled labour and relatively low productivity growth: that, combined with a poor demographic outlook and an ageing population could be holding companies back.
“Where’s the future demand going to come from?” said Mr Pill. “If it’s not going to be that strong, why would you invest in Germany now if it’s a shrinking market? Is Germany the best place to invest in productive capacity when there are growing markets in Asia and the US, or central Europe?”
Economists also say Germany’s investment climate is not attractive enough. Companies cite problems such as poor internet access, a lack of venture capital and a tax code that lacks incentives for investors.
In its latest annual report, the German Council of Economic Experts, a panel that advises the government, said “improving Germany’s investment climate” should be a “top priority” for ministers. “That could increase [the country’s] production potential and reduce the current account surplus at the same time,” they wrote.
The IMF’s Ms Kozack said that, despite the government’s protestations, it could do plenty — addressing the lack of skilled workers, for example. “If it were to invest more in education, in life-long learning, in training programmes, that could alleviate that constraint,” she said. It could also increase productivity by encouraging entrepreneurship, deregulating professional services and enhancing competition in network industries such as railways, she said.
But with Germany’s economy humming, unemployment low, growth steady and corporate profits rising, such far-reaching supply-side reforms are unlikely to materialise. “Is there a lot of pressure to do that?” asks Mr Pill. “The answer is no.”
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