German Investment: The Pedal Is Off the Metal

There is an ongoing discussion on whether Germany is underinvesting and whether it could do more to increase its growth through investment. An analysis of recent trends produced by Roubini (subscription only; referenced today in Bloomberg) shows that German investment is low when measured against its current ability to invest, and is unlikely to significantly increase in coming years, capping output growth. German structural and policy justifications are not irrational, although they are short-sighted; and current trends represent a missed opportunity to stimulate the economy, while limiting growth potential possible positive spillovers to the rest of the Eurozone.

Although households have historically been net saver, in the past three years the government has become a net saver as well. The government is giving priority to fiscal consolidation; reducing debt levels permanently and faster than required by the European rules. They are worried about long-term demographic trends and the expected age-related spending as the population is projected to decrease and age. On the private sector side, reforms to the pension scheme and energy sector limit the cost-effectiveness of investment. Once firms decide to establish in other countries, Germany loses these opportunities to expand its industry. In addition, households and corporations continue to deleverage and credit remains relatively anemic.

Present conditions could lead to a scenario in which Germany overheats at a very low growth rate. Persistent low growth (and the corresponding low potential output) would make it harder to finance the expected demographic trends. Moreover, current conditions present a missed opportunity for an infrastructure push that impacts potential output growth and helps to correct macroeconomic imbalances. Eventually, it will limit EZ growth, and the ability of Germany to remain the engine of growth and the leader that facilitates the EZ’s move to a transfer union.