A deepening German recovery shines in Hanover

Nowhere is better for showing off the strengths and charms of the German economy than last week’s Hanover Messe, the world’s largest industrial fair. Machines from packaging sorters to a metalbashing assembly line for cars stood in this temple to the technology and innovation of Germany’s famed Mittelstand, the small- and medium-sized companies that form the backbone of the country’s economy.

But this year there was a new wrinkle on the German success story: after years of depending on exports for growth, domestic investment in plants, machinery and other production capacity has finally picked up. For economists, the boom in investment is important because it means Germany’s year-old economic recovery will be more self-sustaining and less dependent on the fortunes of the rest of the world.

“Until the end of 2006 we had something like a traffic jam in domestic investment. That has now ended and we are seeing significant double-digit growth,” says Thomas Kaeser, head of Kaeser Komprossoren, a leading manufacturer of air pressure compressors.

The picture is repeated across the German economy, from the smallest makers of bearings to the largest industrial groups such as Siemens, as companies from sectors from chemicals to consumer goods invest in new machinery. In the first two months of this year domestic manufacturing orders were up 24 per cent from last year, compared with a mere 2 per cent increase for the entire period of 2000-2006. International orders for German manufactures were also up 17 per cent this year compared with growth of 53 per cent from 2000-2006, according to the VDMA engineering association.

Wolf Meier-Scheuven, managing director of Boge Kompressoren, one of Mr Kaeser’s rivals, proudly shows off machines including an energy-efficient small compressor and an oil-free one – all housed in the vivid blue colour of the company. He says he is relieved that domestic investments are finally booming again, with his company’s orders up 15 per cent in the first three months of the year compared with the previous year. But he adds: “It has gone so far that we have some worries about our export business. It is difficult to keep up because we are supplying so much in Germany.”

After five years of sluggish or zero growth, Germany’s economy bounced back into life last year to expand by 2.7 per cent. The turnround first became visible in the fast-growing export sector but it is clear from the optimism at Hanover Messe that the recovery has now spread thoughout the economy. A key indicator of how things will go in the next few years, say economists, is the willingness of companies to invest in expensive new production capacity at home. If domestic investment is strong, outside shocks such as a change in exchange rates or a slowdown elsewhere in the world will be less troublesome. “The problem in the economy has been investment and the brutal decline in it. The fact that investment is picking up is very good news and, together with the upturn in the labour market, means you have a self-sustained recovery,” says Dirk Schumacher, economist at Goldman Sachs. Germany’s five leading economic think-tanks last week said the economy would grow by 2.4 per cent both this year and next.

The crunch of new orders has left many companies struggling to fulfil them all. Klaus Mairhöfer, chief executive of the start-up Ropal, which has developed a cheap alternative to chrome, says he is severely constrained as he tries to ramp up initial production of spraying lines in the automotive and fittings industries. “The investment boom is causing us a problem. The delivery time for production systems has increased to six to eight months at least and that is crimping our growth,” he says.

Economists and central bankers, meanwhile, are still trying to decide whether the boom in investment represents simply the replacement of ageing machines or the addition of new production capacity – the latter indicating more economic growth. But executives interviewed indicated unanimously that it was the latter, something that Mr Schumacher hails as highly positive.

Roland Bent, managing director for marketing and development at Phoenix Contact, a leading automation company, says: “Since the end of the investment blockage, we are seeing lots of orders for new capacity. The investments have a lot to do with confidence. There is a lot of investment in Germany for products that will then be sold abroad but also for Germany.”

Phoenix Contact is investing itself. “We need new machines in our factories – 80 per cent of our value is still produced in Germany – and that in itself leads to higher demand,” he adds.

Helmut Gierse, an executive of Siemens, Europe’s largest engineering group, is as enthusiastic as others about the jump in orders: “Lots of manufacturers are at the limits of their capacity, at 80-90 per cent, and then if you want to deliver more you need more capacity.”

The recent increase in domestic investment has at least temporarily halted the outsourcing of production abroad. Mr Gierse at Siemens said that outsourcing is “much lower than three to four years ago”, adding that companies are finding outsourcing brings a one-time gain but plenty of problems afterwards. He argues it does not make sense to locate production and development functions in different countries, adding that only a few lower-cost countries have gained the necessary skills in certain areas – such as the Czech Republic with electric motors.

The decrease in outsourcing has also buttressed employment statistics. After long complaining that growth needed to pick up considerably before they would consider hiring, companies have started creating new jobs in large numbers. Some 500,000 have been created in the past year in Germany, giving economists such as Mr Schumacher the biggest grounds for optimism on the economy.

Sceptics suggest that a continuing boom is far from assured, and could be killed off at any time by a strengthening euro or a large pay settlement in the ongoing wage talks with labour unions. But none of the bosses in Hanover think these clouds on the horizon will be enough to temper the optimism. All say they are no longer moving production abroad, if they ever were. Boge’s Mr Meier-Scheuven even thinks Germans’ natural inclination to pessimism may even have a positive side: “There is always anxiety but maybe that only helps us make high-quality products. Germany is certainly a very attractive business location and this increase in domestic orders just underlines that.”

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