Germany's poor economy faces years of stagnation

This should be mitigated by weakening exports rather than strong growth in consumer spending. Nevertheless, German consumers are as cautious as ever and continue to squirrel away large sums of their income.

In any case, weak aggregate demand is not the real problem. Some more profound factors give serious cause for concern. For starters, the working-age population is declining. In the past, this has been mitigated by substantial declines in unemployment and increases in female participation rates.

With unemployment now hovering around 3 percent, it doesn't have much room to go any further. Female labor force participation is probably at an all-time high.

Of course, like other European countries including us, we can deal with this problem by importing labor from abroad. But this does not seem politically desirable, especially given the rise of the right-wing AfD party.

Demographics are not everything, and a surge in productivity growth can be imagined. But this too does not seem likely.

In this country, we are used to admiring the structure of the German economy, its spectacular success in export markets and its heavy focus on manufacturing, which accounts for 20% of GDP compared to 9% in Britain.

The strength of the euro was emphasized soon after its creation in 1999, when it was widely feared that Germany might have a competitiveness problem against other euro members. In the event, the opposite happened.

Germany engaged in internal devaluation through reduced domestic spending and widespread wage controls. This resulted in Germany's huge trade surplus with its fellow euro members and the rest of the world.

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For all the wonders of the German corporate sector, Germany is far from the most dynamic or entrepreneurial economy. It is weak in all things digital and has only a small artificial intelligence department. And as the benefits of AI wash over all economies in the coming years, it seems Germany may not be the best place to take advantage.

Writing Germany is wrong. It has several fundamental strengths to justify such a judgment. And we've been here before. After reunification, Germany was widely derided as the sick man of Europe. But it soon recovered. However, such a revival is unlikely to happen again.

This has economic and political consequences. For the remainder of this decade, I reckon German economic growth will not exceed 0.5pc per year. Weak economic growth in Germany could make things more difficult for its trading partners.

More importantly, on the political front, its underlying economic problems make Germany reluctant to take on a leadership role in Europe or support closer EU integration.


Roger Bootle is a senior independent consultant in capital economics. [email protected]

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