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Germany Asks If Its Economic Boom Needs a Policy Rethink

Updated on
  • Bundesbank/IMF conference to discuss German surpluses, wages
  • Christine Lagarde and ECB’s Benoit Coeure are among speakers

Germany is about to throw its economic boom open to debate.

Acknowledging a “particularly intense” discussion in recent years on matters such as the country’s twin surpluses, the Bundesbank will host a clutch of policy makers and economists in Frankfurt on Thursday, including International Monetary Fund Managing Director Christine Lagarde.

While robust growth and record-low unemployment have been a boon for Europe’s largest economy and the region, it has also drawn persistent criticism for being reticent to spend. A focus now is whether that’ll change as tight labor markets push up wages and companies invest, and whether the government will make the reforms needed to boost productivity.

“The trouble in Germany is there’s a lot of complacency,” Ifo Institute President Clemens Fuest, who will speak at the event, said in a Bloomberg TV interview. “The government thinks it needs to do nothing because the economy is going alright. But that’s wrong -- the next crisis will come.”

On the eve of the conference, Lagarde urged Germany to rise to its challenges and invest in the future.

“For Germany and for the euro area, the dawn has broken and the sun is today shining brighter than it has for quite some time,” she wrote in a blog post on the IMF’s website. “That’s very welcome news -- let’s make the most of it by repairing the roof.”

Current Account

Major Imbalances

Germany continues to outsell G-7 peers in global markets

Source: OECD Economic Outlook

One of the conference’s more controversial topics might be Germany’s current-account surplus, a lightning rod for criticism -- including from U.S. President Donald Trump’s administration -- that it’s a sign of trade distortion. Lagarde’s IMF has urged the nation to reduce its external imbalances.

German politicians have balked at the suggestion that maybe the country should export less or import more. Chancellor Angela Merkel has noted the criticism, without accepting it, and said last year that her government’s plans to invest more in infrastructure might help.

Fiscal Policy

Another German policy to draw accusations of miserliness is the insistence on a budget surplus -- to the tune of 1.2 percent of gross domestic product last year, the fourth consecutive excess and the biggest since reunification in 1990.

The issue of what to do with the cash has been hotly contested. The government wants to reduce its debt burden. At more than 60 percent of GDP, that’s above the maximum set by European Union rules, though Germany is hardly alone. The country’s top economic institutes weighed in with their biannual assessment last fall, arguing for lower income tax and social-security contributions. Some economists want greater investment in education.

What Our Economists Say ...


“Germany’s economy had an exceptional 2017. This momentum is likely to continue over the next five years while running above potential.”
-- Maxime Sbaihi and Jamie Murray, Bloomberg Economics

To read more, see our German Country Primer

Wage Growth

If Germans are to spend more, they probably need to be paid more. Yet despite the lowest unemployment since reunification, and in common with developed nations elsewhere, wage growth has been slow to pick up.

That may be on the cusp of changing. Germany’s largest union IG Metall is in talks on behalf of 3.9 million metalworkers and engineers for 6 percent more pay, plus an option to receive subsidies for reduced working hours to take care of family members.

Bolstering its argument is the increasingly scarce supply of labor. The Bundesbank predicts that an aging population and slower migration will lead to a significant decline in employment growth in the next few years. That holds ramifications for output if companies don’t find a way to boost productivity.

To read more about Germany’s wage negotiations, click here.

“We’ve not seen this kind of economic data from Germany since the reunification -- it’s unprecedented,” said Claus Vistesen, an economist at Pantheon Macroeconomics. “Whether growth can be sustained is another question, especially if you look at where the labor market is, but that doesn’t necessarily mean it’s going to hit a brick wall.”

— With assistance by Matthew Miller

(Updates with comments from Lagarde starting in fifth paragraph.)
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