If you listen to the news, one thing is certain, Germany’s economy is going down the drain. And, yet, here you are about to listen to an economist on YouTube telling you: don’t worry about Germany’s economy.
It’s going to be just fine… and may arguably even have a very bright future ahead of it, for five reasons, starting with
Reason 1: Germany’s industry is exceptionally resilient
To see why, just zoom out a bit and you will see that Germany has been Europe’s industrial base for well over a hundred years. Germany’s industry has survived two wars. It has survived splitting up the country. It survived the stagnation of the early 2000s, when Germany was coined the sick man of Europe and it, yes, will survive this minor downturn as well.
Why?
Well, besides that fact its infrastructure and knowledge is firmly established, the German industry stands out by the fact that it is highly diversified. In fact, the Harvard complexity lab has consistently ranked Germany in the top 5 most complex economies in the world, just below Japan, but well above the U.S. and even China.
This means that if there is a crisis in one industry or one particularly large firm, there are many other areas of German industry that may cushion the blow. Today, this is more relevant than ever, given that the main problem German firms have been dealing with the last couple of years is a massive skills shortage.
A skills shortage, that sounds pretty bad. But, actually let’s take a step back and think about that for a second. There are not enough skilled people in Germany to produce what German firms can potentially produce. But, you could also say that there are just too many highly competitive amazing firms in Germany for its workforce.
That is a problem that many countries would love to have.
It means that news which would be horrible in most countries, like companies wanting to close factories and move them elsewhere, is actually good news for Germany. It is the skills shortage solving itself.
The skill shortage is pressuring German wages to go up. This causes some, less productive firms, like Miele and Volkswagen to move factories elsewhere. And, while this is terrible for those people losing jobs they may have loved, it means that on the scale of the economy, a bunch of skilled workers have just become available to help the thousands of other great German firms that cannot grow without them.
Sadly, German society does not yet seem to fully understand this is how the economy is supposed to operate, as the news that Volkswagen may keep factories open in exchange for a 10% pay cut to potentially keep factories in Germany was celebrated at somewhat good news. It is not. Artificially suppressing wages like this keeps ordinary Germans poorer than they need to be, and it starves smaller German companies of the workers they so desperately need.
Allowing the skills shortage to solve itself may even solve Germany’s other big problem, it’s lack of innovation. Indeed, the German press has been alarmed about how new start-ups halved between 2003 and 2019, and then again went down another 6% since 2019.
But, then again, is it any wonder that young talented Germans are not starting new companies if the skill shortage is so bad that they have their pick of amazingly well paid jobs straight out of university?
So, the fact that some of Germany’s most well-known companies are in trouble today, that may actually be good news, as it will help companies and start-ups struggling with the skills shortage.
Although, with Trump back in the oval office, deglobalization is likely to continue. Germany’s firms famously profited handsomely from globalization in the past, selling machines and advanced goods to China. So now, with both China and the U.S. increasingly hostile to German exports, could it be that Germany’s industry is facing decline after all?
No, not necessarily because the second reason to be optimistic about Germany is that
Reason 2: Germany is well positioned to profit from fragmentation
Yes, that’s right, I said fragmentation, not deglobalization. You see, there are hopeful signs that deglobalization will mostly take the shape of decoupling between blocs of countries. But, that within these blocs, countries will keep trading intensely with each other.
Even so, the fact that the rise in globalization is over, will surely still be bad for Germany’s companies, right?
No. You see, another way to look at it is that German companies had basically already completed globalization, during which they profited from selling their technology to China. However, by doing so, they created their own biggest global competitor.
But, now with Trump back in the White House, China’s position as factory of the world looks increasingly fragile. Therefore, other countries, like Vietnam, Hungary, and India have an opportunity to become the next factory of the world. But, to do so, they will need …. the latest German technology.
That is of course, if it wasn’t for Germany’s terrible government, that previously only pissed off Trump, stifled German innovation with too much red tape and foolishly neglected to invest in Germany’s infrastructure, when it could borrow at 0% interest rate.
But here again, Germany will be fine because
Reason 3: Germany’s democracy is working as it should
That is, if a government fails to solve the problems that the public wants them to solve, in a functioning democracy, they should be voted out.
Indeed, this is exactly why, while the collapse of the Schulz government may look like a sign of weakness. I see it as a sign of strength. His squabbling government was not able to fix Germany’s problems. So, it’s popularity plummeted, which led to more squabbling in the coalition, which then subsequently collapsed.
Sure new elections are messy, and they could go wrong. But, one thing is clear, the German public is fed up with Germany’s crumbling infrastructure, inefficient government, cost-of living crisis, and red tape.
So, there is immense pressure for the next government to fix these problems, or fall and try again.
That being said, there is still one glaring weakness that Germany’s politicians have been too slow to address: Germany’s dramatic demographic decline. A problem that could be so bad that analysts like Peter Zeihan have said is essentially a death-sentence for the German economy.
Luckily though, I’m here to tell you that Germany will be just fine because
Reason 4 Germany’s demographic decline is actually quite manageable
Sure, as you can see here: Germany is facing a big decline in its working age population and a corresponding rise in its population of elderly. And, as you can see here, Germany’s population decline is more drastic than it is in countries like France and the United States. However, it is far less dramatic than it is in a country like China, where the working age population will inevitably fall below the number of elderly already in 2075.
But, not only will China’s working age population fall faster than that of Germany, the UN is also far more confident that in fact, it will fall, given that the shaded area, which is the confidence interval, is much smaller for its China projections than for Germany.
The reason is simply that in the past, Germany has seen some pretty big migration waves that have caused its population to increase, even though it had been predicted to decline due to low fertility. This could very well happen again. Sure, there is very little political appetite for that right now. But, maybe in 20 years when labor shortages are much more extreme, it could very well be that Germany again welcomes with open arms immigrants from the East, or even South.
And, even if that doesn’t come to pass, this chart of Japan’s GDP per person in terms of purchasing power shows that an advanced, democratic, and well-diversified economy can age gracefully, growing more slowly, sure, but growing nonetheless.
And, unlike Japan, Germany’s government enters its demographic decline phase with exceptionally low debt meaning the country has an exceptional amount of financial room to support an older population.
Of course, now you may say. But, even when corrected for a demographic decline, Germany is currently performing much worse than countries already ageing faster like, for example Italy.
which brings us to my final argument, which is that
Reason 5: Germany’s current problem is temporary
As you can see here, Germany is unique amongst Western economies in that manufacturing still accounts for a large share of it’s GDP. This means that the German economy is exceptionally exposed to changes in people’s preferences for either goods or services, preferences that are usually pretty stable.
Except for of course, during the pandemic, when the world could not spend that much on services anymore and started ordering way more goods, causing a global manufacturing boom. Not coincidentally, Germany’s economy did exceptionally well during the pandemic.
But, now, with the pandemic well behind us, the global manufacturing sector is in recession. This also affects the United States. The Germany economy is just feeling it much more intensely because it is still exceptionally dependent on manufacturing.
So of course, where Germany did better than others in the aftermath of the pandemic, it is now doing worse. Luckily, the upside is that, when global manufacturing inevitably recovers, Germany will likely do so as well.
Discussion
So, even though the news about Germany is seems pretty bad right now, and some of these problems, like demographics will likely lead to lower, Japan style growth in the future, I think that Germany will be just fine because: (1) it’s industry is well diversified, (2) it is well positioned to profit from fragmentation, (3) it will get a new, potentially much more competent government soon, (4) it is relatively well positioned to deal with an ageing population, and, (5) global manufacturing will recover from the Covid aftermath soon.
Although, just to be crystal clear, what, I’ve done here is, essentially presented you an opinion. Hopefully one with convincing arguments. But, ultimately, any economic opinion about the future should be taken with a large grain of salt, given that it depends for a large part on the decisions of politicians, whom are unpredictable. For example, if China invades Taiwan or Trump has a fallout with Germany, many of my optimistic arguments could become far weaker overnight.