Photographer: Simon Dawson/Bloomberg

Aging Germany Is Almost Ready to Spend

Deutsche Bank study sees current-account surplus narrowing as population gets older

Germany’s much-criticized current-account surplus is set to become smaller in the coming years as spending patterns shift with changes in society.

A study by Deutsche Bank economists Heiko Peters and Robin Winkler finds that the country's surplus — mostly driven by net goods trade — will fall by 20 percent by 2020, to around 7 percent of Germany’s gross domestic product. While still big, it’s a far cry from the record 8.8 percent of GDP, or 275 billion euros, it is projected to reach this year.

It's a running debate. The International Monetary Fund, the U.S. and fellow euro-area countries have all argued that the current-account balance is proof that Germans are saving too much and not spending enough.

The reasoning is that while Germany’s exports are benefiting from the weak euro, wages and government spending are low, creating an excess of savings and curbing imports. Germans respond that they cannot be asked to make their economy less competitive.

Whichever side of the debate you are on, the Deutsche Bank study shows that some structural factors are poised to reduce the imbalances of the German economy in coming years. 

The biggest role will be played by demographics. Germany is aging fast and an older population earns less (pensioners make less money than workers at the apex of their career) and tend to spend more. This will bring the savings rate down.

Then there is the housing market. After years of near-stagnation, German real estate is entering a period of expansion, and an influx of migrants is adding to already buoyant demand. Construction will take years to catch up, in the meantime, prices are bound to rise.

How will this impact the current-account balance? In short, higher real-estate values typically translate into higher spending. Homeowners feel richer as the value of their house goes up. Meanwhile, building material will come into the country from abroad. So consumption and imports increase. 

Meanwhile, global trade is set to slow, and with it demand for German-manufactured goods. 

Even so, the decline in the current-account surplus will only partially help European peers.

“Some of the deterioration will benefit the balances of Germany’s European neighbors,” wrote Peters and Winkler. “But the main decline will be vis-a-vis the traditional importers in Asia, the Middle East, and elsewhere.” 

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