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July 3, 2017
The developed industrial countries have experienced a steady decline in trend growth since the mid-70s – and Germany is no exception. The robust cyclical upswing is veiling this creeping erosion of growth. The demographic developments will considerably weigh on trend growth in the medium and the longer term. They will dampen labour supply, capital formation and total factor productivity. By 2025, trend growth looks set to halve again, to only ¾%. The electoral programmes of the established parties incorporate different positions on this key issue, as is to be expected. [more]
Slowing German trend growth does not seem to be a major issue in the electoral campaign Germany Monitor Bundestag elections 2017 The developed industrial countries have experienced a steady decline in trend growth since the mid-70s – and Germany is no exception . By 2025, trend growth looks set to halve again, to only ¾%. The robust cyclical upswing is veiling this creeping erosion of growth. The situa- tion is rendered even graver by the fact that policymakers did not adopt signifi- cant measures to support growth during the past legislative period; indeed, they even scrapped some important reforms. The performance of the German economy depends on three input factors: la- bour, capital and technological know-how. Labour productivity growth is deter- mined by capital intensity, the qualifications of workers and the pace of techno- logical progress. Labour, as an input factor, is suffering from the ageing and shrinking of the population. Demographic changes will reduce the workforce. The capital stock is currently growing at a subdued clip and investment activity is moderate. The current level of technological know-how is reflected in total factor productiv- ity . The growth contribution of total factor productivity has recently declined, possibly because the benefits of specialisation are shrinking and because input factors have been reallocated less efficiently. It is absolutely necessary to raise the participation rate. Against the background of accelerated structural change, this can be achieved only if the general level of qualification is raised and it becomes easier to reconcile a career and a family, particularly for women. Better education and vocational training will also help to improve the quality (and thus raise the growth contribution) of labour. More day schools are a step in the right direction. At the same time, digitalisation increases the need for regular professional training. Specialisation helps to lift productivity. That is only one reason why policymak- ers should support free global trade. If conditions for businesses are improved as well, Germany might see stronger capital stock growth and benefit from competitive advantages in the future. Autor Marc Schattenberg +49 69 910-31875 marc.schattenberg@db.com Editor Stefan Schneider Deutsche Bank AG Deutsche Bank Research Frankfurt am Main Germany E-Mail: marketing.dbr@db.com Fax: +49 69 910-31877 www.dbresearch.de DB Research Management Stefan Schneider 03/07/2017 Slowing German trend growth does not seem to be a major issue in the electoral campaign Slowing German trend growth does not seem to be a major issue in the electoral campaign 2 | 03/07/2017 Germany Monitor Bundestag elections 2017 During the past 12 months, poll outcomes surprised observers several times. Outsiders were elected presidents, either against the will of their parties or with the backing of a newly launched movement. Or voters overthrew decades-old political tenets. Against this background, German politics seem like a haven of stability. The surprise appointment of SPD leader Martin Schulz was the only event that tem- porarily caused some excitement. While Germany is in its best economic condi- tion in years, the new government will nevertheless have to deal with several important issues, namely globalisation, the future of Europe, the new geopoliti- cal situation, climate change and demographic challenges, which are becoming ever clearer. This is the first report in a new series, in which Deutsche Bank Research aims to examine how the political parties plan to address these and other important issues and analyse whether their proposed solutions are ade- quate. Of course, we do not aspire to provide a complete analysis of the elec- toral programmes. Slow ing German trend growth does not seem to be a major issue in the electoral campaign 3 | 03/07/2017 G erm an y M on it or Si nce the mi d-70s, m any dev el oped industr i al c ount ri es hav e seen t hei r real gros s dom esti c pr oduct (G DP) growth r at es steadi l y decli ne. As Germ any is cur rent l y ex peri enci ng an upswing, di scus si on of t his struc t ural gr owth sl ow- down (t o whi ch G erm any i s not immune eit her) has rec eded i nt o t he back - ground. I t i s theref ore not surpri si ng t hat both t he Council of Ec onomi c Ex perts and t he O ECD thi nk that poli cym aker s hav e not m ade suf f i ci ent ref orm eff ort s duri ng t he past legi sl ativ e period. T he reasons f or t he sl owdo wn i n growth ar e t he subjec t of a passionat e academ i c debate. One camp of econom i sts has coi ned t he term “secul ar stagnat i on” and beli ev es that the i ndustri al count ri es cannot escape t hi s dev el opm ent. 1 W it h regard t o Germ any, t he dem ographic change i s evi dent . To pr ev ent tr end growth f rom dr opping cl earl y below 1%, l abour m ark et, educ ati on, tax and regional economi c poli ci es as wel l as immi - grat i on poli ci es will need t o change dr asti call y and soon. M oreov er, wi t h scope f or incom e gr owth and redi stri buti on of weal t h bei ng cl earl y limi t ed in t he m e- di um t erm , poli ti ci ans shoul d t ry t o manage ex pect ati ons instead of nurturi ng hope s of a (r e)di stri buti on of weal t h. T hi s is easy t o understand if we t ake a short l ook at how the standard of l iv ing dev el ops. If real G DP per capit a grows at an annual rate of 4% – a rate that was not unusual up t o t he 1970s – prosperi t y doubl es wit hi n j ust ov er 17 years. If t he growth r at e decl i nes to the c urr ent v al ue of 1. 4% (O ECD), howev er, that out - com e woul d t ake r oughl y 50 years. T hese f i gures sho w – parti cul arl y against t he back ground of dem ographic change – t hat the tim e when pol i cym aker s coul d cont ent t hem selv es wit h pay i ng li p-serv i ce to prom oti ng prosperi t y i s ov er. T he el ectoral pr ogram mes of t he traditi onal parti es inc orpor at e dif f erent posi - t i ons on t his key i ssue, as i s to be ex pect ed. In gener al, howev er, we bel i ev e t hey r ely t oo heav ily on the f av ourabl e stat us quo and f ocus on di stri but i on i s- sue s. T he Li beral s are the onl y excepti on. I nput f actor l abour: dem ographi cs and educ at i on A m ore det ail ed ex pl anati on of t he relati onshi ps betwe en i nput f act ors i s pro- v ided in t he appendix . O ne t hing is cl ear, howev er: t he contr i buti on of t he “l a- bour” i nput fac t or to ov eral l growth depend s on the num ber and the quali ty of t ot al hours work ed. I n pri nci pl e, dem ographi cs limit t he num ber of pot enti al work i ng hours. Ho wev er, t he actual num ber of hour s worked m ay v ary accor d- i ng t o the parti ci pati on rat e of the work f orc e. The quali ty of each worki ng hour i s det erm i ned by the general l ev el of educat i on and prof essi onal t rai ni ng. Labour sup pl y depends on t he part i ci pati on rat e of t he work f orc e. In t urn, t he si ze of t he work f orc e i s determi ned by dem ographi cs. Germ any r ecentl y regi s- t ered net imm i grati on. I n the m edi um and long t erm, howev er, t he Germ an work- f orce look s set t o age and shri nk, unl ess there i s signif icant addi ti onal net imm i - grat i on. 2 A cc ordi ng t o Bundesbank anal ysi s, t he G erm an work f orc e i s li kel y to decl i ne by about 2. 5 mi lli on peopl e in the m edi um t erm. 3 T he cur rent l ack of qual if i ed labour i s a f oret aste of t hi s dev el opm ent. T he Bundesbank conc l udes that dem ographi c dev elopm ent s will consi derabl y wei gh on t rend gr owth i n t he m edium t erm . Accordi ng to i t s calcul ati ons, t he pot ent i al growth rat e will av erage 0.75% bet ween 2021 and 2025. 4 Hi gher work- f orce par ti ci pati on and posi t iv e net imm i grati on mi ght cushi on t he decl i ne. 1 S ee L . S um m ers , S ec ul ar s t ag n ati on an d m on et ar y p olic y, F ed er al R es er ve B ank of St. L ou is R evi ew , S ec on d Q u art er 20 16 , 98( 2), pp . 9 3- 11 0. 2 S ee F ed er al S t atis tic al Of f ic e: G er m an y’s p op ul at i on b y 2 06 0, R es ul t s of t h e 1 3 th c oor di n at ed p opu l at i on pr oj ect i on, 20 15 . 3 B as ed on th e r es ults of th e 13 th c oordi n at ed p opu l at i on pr oj ect i on, as s umi ng z er o n et m igr ati on . 4 S ee D euts c h e B un d esb an k, D em ogr ap hic c h an g e, i m mi gr ati on and t h e p ot enti al outp ut of th e G erm an ec on om y, M ont hl y R ep ort , A pri l 2 01 7, p. 3 5. -1 0 1 2 3 4 5 6 71 76 81 86 91 96 01 06 11 14 G er many Fr anc e Italy Spain UK J apan USA T rend growth 1 Change in r eal G DP per hour s wor k ed in % y oy , HP- filter , ***** ******** ************* ****** * ***** **** ***** * **** **** **** **** **** **** **** **** ****** **** ****** **** ****** **** ****** **** ****** **** ****** **** ********* ********** ****** *********** * **** **** ***** * ** ************** ******* *** * * * * * ** *** * ** ** * * ******* ** ** * * ***** * * * * * ******** ****** ********* **** * ***** * * ** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** **** **** **** **** **** ****** **** **** ****** **** **** ****** **** **** * ** * * ** * *** *** ** * * * * * ***** ******************** *********** ************** * ****** ***** ***** ************ ************* ******* *************** * *** ******** ************ **** * **** * **** * **** * **** * **** * Slowing German trend growth does not seem to be a major issue in the electoral campaign 4 | 03/07/2017 Germany Monitor The OECD recommends increasing the workforce participation of women. This would require better childcare options. In addition, income tax incentives would help to make paid employment more attractive. Successful labour-market inte- gration of refugees is another important issue. The Council of Economic Experts supports additional reforms to make the la- bour market more flexible, particularly to reduce long-term unemployment. As the workforce ages, flexible working-hour schemes might create an incentive to work longer. As a side benefit, this would help to ensure a transfer of knowl- edge to younger employees. This issue is the one where the parties differ most. While the left-wing parties want to create further incentives for early retirement and, in particular, categori- cally reject another hike in the retirement age, the conservative and liberal par- ties aim to increase flexibility and extend working lives. As the available work- force looks set to shrink in the future, the conservative standpoint appears more growth-friendly. However, the measures implemented during the past legislative period run counter to this goal (retirement at 63, hike in pensions paid to moth- ers). Lifelong learning starts right from the cradle – education is key The quality of labour must improve steadily to strengthen the growth contribution of this input factor. Digitalisation presents particular challenges and opportuni- ties in this context. The education system will need to become more flexible and adapt to new challenges – after all, lifelong learning starts right from the cradle. In particular, childcare options and kindergarten education should be improved. If better childcare is available, women will find it easier to work full time. The OECD has emphasised that the correlation between the social and eco- nomic backgrounds and academic success of a child is particularly close in Germany. Measures should be taken to ensure equal opportunities for all chil- dren. Much remains to be done in terms of university education and vocational train- ing, too, particularly since more and more young people prefer going to univer- sity to starting an apprenticeship. 5 At the same time, many university students drop out of their courses. The universities will need more staff and more funds to meet higher demand. Providing them with better resources would also help to ensure that students receive academically based professional qualifications and that universities can conduct research at the same time. The “Higher Education Pact 2020” was a step in the right direction, we believe. Policymakers will also need to resolve the lack of qualified labour under the dual vocational training system, which is already evident in several fields. The number of school drop- outs should be reduced further. The labour market reforms implemented at the beginning of the millennium helped ensure that numerous people with lower qualifications found a job. Most of them were employed in the services sector. This reduced the average level of qualification and, in turn, labour productivity in that sector. There is thus consid- erable room for improvement via professional training, not least because digi- talisation (also called “Industry 4.0”) will also affect the services sector. As baby boomers retire, a large number of very experienced workers will drop out of the labour market. Beyond dealing with the sheer number of retirements, companies will also have to organise the necessary transfer of knowledge. 5 See Authoring Group Educational Reporting, Education in Germany 2016, 2016, p. 141 et seq. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 15 20 25 30 35 40 45 50 55 60 65 70 75 age Men 2000 Women 2000 Men 2015 Women 2015 Participation ratio by age and sex, 2000 and 2015 4 Sources: Federal Statistical Office of Germany, BiB 35% 39% 12% 4% 10% 19% 9% 4% 34% 35% no full time employment to find education and further training disease or consequence of an accident personal or family obligations no full time employment for other reasons Men Women Reasons for part - time* 2013 5 *Excluding those who did not give a reason. Sources: Federal Statistical Office of Germany, BiB 50% 58% 53% 53% 39% 18 to 24 years 25 to 34 years 35 to 44 years 45 to 54 years 55 to 64 years Participation rate by age Participation of those aged 18 - 64 in professional training measures, 2014 6 Source: Federal Ministry of Education and Research Slowing German trend growth does not seem to be a major issue in the electoral campaign 5 | 03/07/2017 Germany Monitor The large number of refugees is another challenge, particularly because their qualifications differ considerably. Learning German is an important precondition for their labour market integration. Just like the OECD, we believe that meas- ures in this area should be intensified. This shows that there are several potential avenues in the field of education that can be explored to counteract the slowdown in growth. Quite rightly, education plays a key role in almost all electoral programmes. It remains to be seen which measures are ultimately implemented. In any case, there is a lot to do. Input factor capital Capital contributes about one-third 6 to overall GDP growth. 7 This already sug- gests that this input factor is of lower importance than labour. The input factor “capital” is determined by investment activity and depreciation. In general, there are three types of capital: equipment, buildings and other as- sets. In Germany, corporate investment activity is low. This has recently triggered discussions about an investment gap. 8 In response, the Federal Ministry for Economic Affairs and Energy has established an expert committee, which is to work on strengthening investment in Germany. The committee concluded that investment activity was significantly lower than necessary in both the public and the private sectors. 9 Of course, this conclusion met with considerable opposi- tion, particularly with a view to private-sector investment: after all, private-sector investment activities cannot be steered directly according to political prefer- ences. The Bundesbank has pointed out that subdued investment activity may also be due to the fact that companies are adapting to demographic change. Moreover, subdued investment activity may also be due to less wear and tear or to the fact that assets are already quite up to date. 10 From a purely academic vantage point, it is impossible to assume a clear causal relationship between suspected weakness in investment activity and low productivity growth. 11 Political decisionmakers should therefore focus on improving the economic framework conditions rather than on achieving a fixed overall investment ratio, which would depend on political rather than economic considerations. The lib- eral and conservative parties support this approach, whereas the left-wing par- ties favour tighter regulations. 6 See German Council of Economic Experts, Annual Report – “More confidence in market proc- esses”, 2014, p. 114. 7 See Appendix, equations (1) and (2). 8 See German Institute for Economic Research, Wirtschaftliche Impulse für Europa, DIW Wochen- bericht 27, 2014. 9 See Federal Ministry for Economic Affairs and Energy, Wesentliche Fakten zur “Investi- tionsschwäche” in Deutschland, Monthly Report 11, 2014. 10 See Deutsche Bundesbank, Demographic change, immigration and the potential output of the German economy, Monthly Report, April 2017, p. 35. 11 See German Council of Economic Experts, Annual Report – “Focus on Future Viability”, 2015, p. 304. 39% 47% 66% 67% no vocational qualification apprenticeship/ vocational school master school/ technical school university/ -of applied sciences Participation rate by highest qualification of participants Participation of those aged 18-64 in professional training measures by highest qualification achieved, 2014 7 Source: Federal Ministry of Education and Research -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 91 94 97 00 03 06 09 12 15 18 21 Hours worked Capital stock Total factor productivity Potential growth in % Potential output 8 Percentage Points Sources: German Council of Economic Experts, Federal Statistical Office of Germany Forecast 60 70 80 90 100 110 120 130 140 91 94 97 00 03 06 09 12 15 in relation to net operating surpluses in relation to corporate profits Investment compared to net operating surpluses and corporate profits 9 Source: German Council of Economic Experts % Slowing German trend growth does not seem to be a major issue in the electoral campaign 6 | 03/07/2017 Germany Monitor Total factor productivity – technological know-how The current level of technological know-how is reflected in total factor productiv- ity (TFP). TFP cannot be observed directly. Rather, it is equivalent to the differ- ence between the growth rate of total output and the sum of the growth contribu- tions of both labour and capital. TFP therefore reflects all product and process innovations. Its growth rate has declined to about 0.5% during the past 20 years. The reasons for this development are currently being discussed. One potential explanation is that the pace of innovation might have slowed after the boom in information technologies during the 1990s. Several very pessimistic observers even believe that the time of groundbreaking technological progress is over. Of course, others are heavily opposed to this idea. Turning to the German econ- omy, it makes sense to differentiate between the manufacturing and the ser- vices sectors. TFP declined particularly strongly in the services sector. As a result, much of the development in Germany can be explained by the dispropor- tionate expansion of the services sector. In addition, the growth of manufactur- ing depth has slowed. Financing conditions are another potential reason for the slowdown in TFP growth. It is possible that the low-rate environment has ensured the survival of many not very innovative companies in the last few years. This may have pre- vented new, innovative companies from entering the market. According to this hypothesis, capital market interventions have hampered a reallocation of the production factors. Generally speaking, international specialisation helps to realise production po- tential. This applies to both the intra- and the intersectoral reallocation of pro- duction factors. We believe policymakers should therefore work to promote free global trade. An environment that is conducive to research is a precondition for increasing the growth contribution of technological know-how. This factor will have an impact on overall growth only if innovative companies – in particular manufacturing companies – can successfully enter the market. Generally speaking, all established parties have included research and devel- opment as an important topic in their electoral programmes, even though their foci are different. The coalition parties and the liberals support education and research in general. The Greens aim to introduce additional regulation as well. The average age of the members of the two large parties (60 years) and of the MPs (about 50 years) is perhaps one reason why policies in this field are not exactly forward-looking. In addition, the slowdown of trend growth is a gradual macro process, which is hardly felt by individuals. However, the short-term costs of the necessary political adaption measures will rise if policymakers remain idle for long. Indeed, there may well be a “point of no return”, after which it becomes almost impossible to find majorities for the necessary measures, either within the parties or among the electorate. Marc Schattenberg (+49 69 910-31875, marc.schattenberg@db.com) -0.5 0 0.5 1 1.5 2 2.5 3 3.5 92 95 98 01 04 07 10 13 Total factor productivity Capital intensity buildings Capital intensity equipment and other Labour productivity in % Growth contributions to trend labour productivity in the manufacturing sector 10 Source: German Council of Economic Experts Percentage points 0 0.5 1 1.5 2 2.5 92 95 98 01 04 07 10 13 Total factor productivity Capital intensity buildings Capital intensity equipment and other Labour productivity in % Growth contributions to trend labour productivity in the service sector 11 Source: German Council of Economic Experts Percentage Points Slow in g German trend growth does not seem to be a major i ssue in the ele ctoral campai gn 7 | 03/07/2017 G erm an y M on it or Appendi x T hi s sect i on wil l bri efly ex plai n how the dif f erent f actors that i nfl uence out put growth can be def i ned. I t i s easiest t o use t he ec onomi c product i on functi on f or thi s purpose. W e as- sum e t hat economi c output can be descr i bed by t he followi ng Cobb-Dougl a s produc t i on f uncti on: (1) O ut put i n the peri od t, i.e. Y * *** ******* ** ***** ******** ********** ********** *** *** ***** *************** ** ********** ** ***** ****** **** * * ** * ************ * * ****** ** ** ** ******* ****** ******** ****** ** * * *** ***** ***** ****** ********* ********* ** ** * ************ *** ****** ***** ******* ********* *********** ****** **** ** * *** ******** **** * ********** * ***** ***** ********** ****** **** ***** **** ** ******* **** ******* ***** * ***** * ******** ******* ******************* ***** *** ****** ********* * * **** ***** *** ** ******* **** ****** ******** ** *** *** **** ****** ****** * ***** * ****** ************ **** ** ***** * ******* ************ ************* ***** ***** ******** * ********* ************* **** * ** * * * *** * * * * * * ** * * * *** * * ** ** * * * *** * * **** * *** * * ** * * * *** * ***** ** * * * *** * * ** ** * ***** * ******************* *********** ** ****** ******** ***** ** ** * * * ** **** ******** ** *** *** *********** ************* ******* ****** ********* ***** ******* * ************** * ****** * ****** ****** ** *** ******** ***** ********* ************ ***** *** ** ** ******* * ** *** **** * * *** ** *** ** * *** **** ** * ***** *** *** ** **** ** *** ** ****** *** ** *** ** ***** * *** * *** **** *** ***** * * * ****** ** ** * ** * **** ** * ****** ** *** ******** *** * *** * *** * *** ** ** ** ** ** ** ** ** ** ********* ********** ****** ************** ************* ******** **************************** ********* **** *********** ***************** **** ***** **************** ******** ** ****** * ********************** * **** * ** ******** ************* ****** * ***** **** ***** * ** ** ** *** ** ** ** * * ** *** ** * * ****** * In the "Germany Monitor" series we address political and structural issues which have great significance for Germany. These include commentaries on elections and political decisions, as well as technology and industry issues, and macro- economic topics which go beyond the business cycle matters addressed in "Focus Germany". Germany Monitor Our publications can be accessed, free of charge, on our website www.dbresearch.com You can also register there to receive our publications regularly by E-mail. Ordering address for the print version: Deutsche Bank Research Marketing 60262 Frankfurt am Main Fax: +49 69 910-31877 E-mail: marketing.dbr@db.com Available faster by E-mail: marketing.dbr@db.com * The digital car: More revenue, more competition, more cooperation .................................. July 3, 2017 * Uncertainty is slowing capital expenditure ................. January 25, 2017 * Outlook on the German housing market in 2017: Prices and rents in Berlin, Düsseldorf, Frankfurt, Hamburg and Munich ............................................................... January 13, 2017 * Crumbs or pie – how much will Frankfurt's property market benefit from BREXIT? .................. November 28, 2016 * Logistics: weak environment – no trend reversal in sight ......................................... November 8, 2016 © Copyright 2017. Deutsche Bank AG, Deutsche Bank Research, 60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliat es. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. 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