Germany Isn't Investing as in the Past and That's a Problem

  • Borrowing costs have never been lower, domestic demand is high
  • Yet there's little no sign of an investment boom any time soon

All the pieces appear to be in place for a surge in corporate investment in Germany -- except one critical element.

While low borrowing costs, robust domestic consumption and capacity strains mean companies should be itching to spend, the confidence to do so is lacking. Market turmoil, signs of a weaker global demand and Germany’s own aging population are giving bosses plenty of reason to hold back, leaving capital spending as a share of output clinging stubbornly to a five-year low.

That matters both for Germany, where the International Monetary Fund says more capital spending is needed to ensure future growth, and the 19-nation euro area. The strength of the region’s largest economy could be key to whether the currency bloc’s fragile recovery can be sustained.

“Every year since 2013, most pundits including ourselves have been predicting that this is going to be the year that investment really picks up in earnest,” said Timo Klein, an economist at IHS Global Insight in Frankfurt. “But every year something unfolds that clouds the picture, from Ukraine to China, and investment is postponed again. The long-term consequence of this is a reduction in growth potential.”

A report on Tuesday will shed more light on the role of investment in Germany’s economic expansion in the fourth quarter. Preliminary data showed gross domestic product rose 0.3 percent, matching the pace of the previous three months, with government and consumer spending leading the way.

While that’s unspectacular, France and Italy fared worse. The euro zone’s second and third-largest economies cooled, with the latter barely growing, increasing the burden on Germany to be the region’s engine.

Yet investment as a share of German GDP fell to less than 20 percent last year from about 23 percent at the turn of the century, a Bundesbank study in January showed. Private investment slid to 11.5 percent from 13.4 percent, according to Eurostat.

In its February bulletin, the Bundesbank said investment should increase because of an “above-average level of capacity utilization.” However, it also said a “key prerequisite” is that external demand picks up.

“The rate of investment in this country remains below its potential,” Ulrich Grillo, head of the BDI industry federation, said last month.

The IMF and German authorities agreed last year that the conditions for stronger private investment need to be improved. The IMF suggested reforms such as raising the participation of women in full-time work, increasing the dynamism of the services sector, and doing more to help the country’s transition to greater use of renewable energy.

Funding, on the other hand, should not be an issue. Borrowing costs have never been lower and lending conditions as assessed by the ECB are more favorable than their historical average. Post-crisis deleveraging means the average debt-to-capital ratio for non-financial companies has declined by 7 percentage points since 2008, according to a KPMG study.

Companies should take advantage of low interest rates before the “window of opportunity closes,” Carsten Kengeter, Deutsche Boerse AG’s chief executive officer, said last month. “In this way, we can even succeed in setting off a growth spiral that powers itself.”

Investment is projected to pick up this year, albeit moderately. The share of small and medium-sized companies planning to increase capital spending is at a five-year high, according to an annual survey published by the BVMW business association in December.

However, recent global ructions don’t favor an investment boom. German business sentiment is weakening, and the recent rout in European bank stocks could undermine their willingness to lend. China’s slowdown has sent commodity prices tumbling and threatens to drag on world economic growth.

German manufacturing was “near stagnation” in February, with a gauge of factory activity falling to a 15-month low, Markit Economics said on Monday in its purchasing managers’ survey.

EON SE, Germany’s largest utility, said the downturn in the energy industry is a “reality check” for the company’s investment strategy and dividend policy in coming years.

When German companies do invest, they often look outside their homeland. Osram Licht AG will start building a 1 billion-euro ($1.1 billion) production plant in Malaysia in March, and Manz AG, which makes solar, display and battery equipment, is moving more production to China from Germany and Taiwan. Evonik Industries AG, the country’s second-largest chemical maker, is planning to build a world-scale plant in Singapore in response to strong demand.

HeidelbergCement AGdoesn’t consider Germany to be a growth story, a spokesperson for the company said by phone. The world’s second-biggest cement maker does spend on modernization in the nation, but the expansion potential is in emerging markets.

Martin Gornig, an economist at the DIW institute for Economic Research in Berlin, says while that attitude is helping to open up new markets, the long-term problem is an aging capital stock that could make Germany uncompetitive.

“That poses a major threat,” he said.

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