Germany is the fourth largest global economy today. Its exports amounted to EUR107 billion in March 2015 – an all-time high since the 1950’s. Despite being the only European nation with a strong manufacturing base and rising employment rate, will Germany succeed to drive Eurozone’s stagnant economy? And what lessons does Germany’s economic success hold for the rest of the world?
Germany’s resurgence
With the second lowest unemployment rate in the European Union (EU) at 5.3 per cent, Germany’s economy has survived many setbacks. The economic success dates back to the Industrial Revolution due to the early adoption of coal production and rail transportation. Moreover, the fall of the Berlin Wall – the reunification of West and East Germany – and the expansion of the EU created huge market opportunities for Germany.
Often regarded as the ‘Sick man of Europe’, Germany had almost lost hope of returning to rapid economic growth, undergoing recessions in 2003 and a dismal 1.2 per cent (year-on-year) growth rate (between 1998 and 2005). As of Q2 2015, Germany’s Gross Domestic Product (GDP) expanded 0.4 per cent. This is better than the (year-on-year) average of 0.3 per cent from 1991 until 2015.
Path to recovery
As Germany’s economy continues to progress forward, some factors responsible for its steady growth include:
- Export-driven growth
Clusters of small and mid-sized companies – known as the Mittlestand – account for half of Germany’s economic output.
The majority of Germany’s exports are produced by small to medium-sized manufacturers for niche products. These clusters of small and mid-sized companies – known as the Mittlestand – account for half of Germany’s economic output. Mittelstand companies contributed to 18 per cent of exports in 2012.
- Skilled labor force
Germany’s holistic VET involves both hands on experience through corporate training and education at vocational schools.
Germany’s dual system of vocational education and training (VET) is one of the key factors for its economic success. VET enjoys huge support from the Federal Government. A traditional approach that dates back to the 12th century, Germany’s holistic VET involves both hands on experience through corporate training and education at vocational schools.
This means that much of the young population – at the ages of 15 to 16 – take vocational training and apprenticeships leading to a guaranteed full-time job , with a 90 per cent completion rate for apprentices’ training. This system provides training to approximately 1.5 million people in a single year.
- Low unemployment rate
After reunification, the drop in wage rates in the early 1990s and the introduction of the Hartz package of reforms in 2004 improved the employment rate significantly. The reforms – modified today – include reductions in measures and benefits to make the labor market more flexible.
As a result, the unemployment rate fell to 6.5 per cent in January 2015 – the lowest since reunification in 1990. This is around half of the EU’s average unemployment rate of 11.4 per cent.
- Consumer confidence
Consumer confidence in Germany is at a new high. The Consumer Sentiment Index rose to 9.7 points in March 2015 – up from 9.3 points in February – the highest since October 2001.
With cheaper mortgage rates, it has become easier for renters to own homes. A total of EUR190 billion worth of property exchanges were recorded between 2010 and 2014.
Growth potential
Germany has already surpassed the Eurozone’s 0.7 per cent economic growth in 2015. Key sectors to look out for include:
- Automotive manufacturing
One out of every five cars is German-manufactured with a turnover of EUR384 billion in 2014 – equivalent to 20 per cent of the total German economic revenue. Germany continues to host Europe’s biggest automotive industry.
German automobile manufacturers produced approximately 15 million vehicles in 2014, or more than 18 per cent of total global production.
- Renewable energy storage
Germany has been investing aggressively in renewable energy and storage for over 25 years. The nation aims to produce 80 per cent of its electricity through renewables. Renewable energy sources include wind power, bioenergy, solar energy as well as combined heat and power (CHP) energy.
With increasing demand from Europe, the energy storage system market in Germany is expected to take a jump by 2016. Germany is the first choice for various companies who seek to invest in this industry. Close to 15,000 households in Germany were Photovoltaic (PV) Battery enabled in 2014.
- Innovation hub
German business is synonymous with innovation – a driving force behind the country’s successful economy. Its expenditure on research and development is about USD49 billion – 2.6 per cent of its GDP – with a likely increase to 3 per cent this year (2015).
It continues to be one of the leading nations in several technologies such as nanotechnology, biotechnology, aerospace, electrical engineering to name a few.
Taking a cue from Germany
Germany has outpaced its neighbors, with GDP growth of 1.6 per cent in 2014 – comfortably above the Eurozone average of 0.9 per cent. With most economic indicators pointing to strong economic growth, a few sectors help sustain this momentum.
- Services
Germany’s private service sector continues to grow as the Purchasing Managers’ Index (PMI) – which tracks services and manufacturing activity – rose to 54.0 in June from 52.6 in May. Service sector firms continue be optimistic with new customers and increasing capabilities.
- Affordable healthcare services
The nation spends approximately 10.7 per cent of its GDP on healthcare – more than any other European country. Furthermore, the healthcare system is funded through social contributions (taxed at 10 per cent), with the backing of private medical insurance.
- Government and private sector in sync
With high levels of cooperation between the public and private sector, Germany aims to be the most research-friendly nation in the world by 2020. Germany focuses not only on applied industry-related research but also invests heavily in it.
Germany’s Fraunhofer system consists of 60 research institutes and 18,000 employees working with colleges, government agencies and private firms across Germany.
Germany’s famous Fraunhofer system aims to assist tech companies and manufacturers to compete better. This system consists of 60 research institutes and 18,000 employees working with colleges, government agencies and private firms in diverse fields throughout Germany. Germany’s Fraunhofer system consists of 60 research institutes and 18,000 employees working with colleges, government agencies and private firms across Germany.
Challenges
Even as Germany’s economy has held up in the face of crises, there is fear of an economic slump due to sluggish market demand in China and other emerging markets.
Dismal domestic demand
Domestic demand in Germany has been dismal. Most Germans recognize that the country must make stronger efforts to improve domestic demand through employment reforms. Relaxing barriers for women in employment and introducing tax reform could improve domestic demand by giving more purchasing power to the common man.
Labor shortage
At present, there are 117,000 vacant jobs in engineering, technology and science – a gap that could widen to about one million by 2020. To further woo more immigrants, Germany has eased restrictions for foreign qualifications which are crucial to fill the shortage of workers.
Aging transport infrastructure
Germany is at a geographic focal point in the Eurozone. Its geographic position helps explain why it has become the hub of strong export-oriented manufacturing . Maintenance and repair of roads in recent years has been insufficient even though EUR35 billion (a year) is spent on roads via private and public investment.
Aging population
Germany’s working-age population (between the ages of 15-64) is expected to decrease by 14 percent by 2040. Women could help address this shortfall. Despite 70 per cent of women being in the workforce, half of them are engaged in part-time employment, thanks to a combination of tax disincentives and limited public childcare options. However, economic output could increase by 7.5 per cent if women clocked in the same average working hours as men.
Future outlook
As the world’s fourth largest economy and holding its own with the second lowest unemployment rate in the EU at 5.3 per cent, Germany has truly come a long way. The reunification of West and East Germany and the expansion of the EU helped it tap into market opportunities.
What factors explain Germany’s success and how can emerging markets emulate this economic powerhouse?
A number of factors stand out. There is a strong base of private owned firms who are historically committed to innovation and exports in their individual niches. There is a robust public-private infrastructure for training, supported by a public culture that respects the role of technicians and the vocations. There is good public-private co-operation on R&D such that private firms can tap into the Fraunhofer system for R&D co-operation.
The country has also succeeded in uniting all stake-holders – companies, unions, NGOs and government – in order to keep large manufacturing industries rooted and thriving in Germany, such as automotive, industrial and chemical manufacturing. Lastly, Germany’s world-class healthcare system ensures that no one is held back from taking risks by the fear of being bankrupted by healthcare costs.
What this suggests is the importance of public culture. Successful countries need to cultivate a culture of pride in innovation and competitiveness. Such a culture needs to be supported by strong institutions such as Germany’s VET system. Both culture and institutions are mutually reinforcing. Without these, countries will find it hard to get all stake-holders (including companies, youth, consumers and workers) to make the decisions necessary for sustained economic competitiveness.
Germany needs to improve its domestic demand, fix its aging transport infrastructure and address its labor shortage crisis through engaging more women in the labor force. The fact that it is taking these problems seriously speaks well of Germany’s political culture and economic research ecosystem – yet another pre-requisite of national economic success.
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