Strong man’s weak spot
Germany passes for Europe’s economic strongman. It may in fact be weaker than it looks. For years, the low level of corporate capital expenditure has undermined the country’s industrial future. While real GDP is already 1.3 percent above the pre-crisis peak of early 2008, real equipment investment is 16.5 percent below what it was then. Moreover, it has been falling for six quarters in a row.
There are many reasons. The collapse of investment immediately after the Lehman bankruptcy points to cyclical factors. Then the euro crisis added major uncertainties, making companies ultra-cautious.
Ironically, the sustained weakness might be the flip side of Germany’s sterling employment performance. A looming shortage of skilled workers as well as policy incentives may have kept companies from sacking temporarily unneeded workers. Reining in capital expenditure could have been a way to compensate for payrolls being kept higher than has been strictly needed.
Cyclical factors are only one part of the story, though. The investment slump has in fact been bigger than historic patterns suggest. Its magnitude and duration has repeatedly surprised forecasters. Domestic demand and overall exports have been up most of the time since early 2010, cheap credit is readily available, and unit labour costs are under control.
Furthermore, the current capex freeze reinforces an unsettling long-term trend. German investment has been well below the European average for more than a decade. Gross capital formation has fallen from 23 percent of GDP in the early 1990s to 17 percent today.
The euro crisis will peter out at some point. Pent-up demand should then trigger a temporary investment boom. However, in the past two decades, cyclical recoveries have never been strong enough to reverse the long-term downward trend. It is hard to see why it should be different next time around.
For a country with an above-average industrial sector and an aging population, this is worrisome. A cutting-edge industrial base can only be sustained by continuous modernisation of the capital stock. Germany’s disappointing investment performance raises questions about its real economic strength – and most importantly about its future prospects.