In the latest IMF Country Focus, the Fund takes aim at the underside of the German economy and finds that "Germany’s Real Challenges are Aging, Underinvestment, and Too Much Red Tape".
The International Monetary Fund released its latest look at the German economy on March27. The IMF start its appraisal by noting that the German economy was the only major European economy not to grow in 2023. Its latest expectation is that growth will be weak this year as well.
Some of the weakness can be explained by German industries weaning themselves off of cheap Russian gas, but the IMF analysts claim that the core of the problem lies elsewhere and that cries that the German economy is irrevocably broken are incorrect. They note that wholesale gas prices are at 2018 levels. The problem, then, is not gas.
German industry is shifting, with some industries such as automobiles doing well by moving to electric vehicles; the auto industry was up 11% in 2023. Industries performing poorly, such as chemicals, metals, and paper, account for 4% of the economy. The trade balance reached 4.3% of GDP, which is above the 20-year average. So, where’s the problem?
Temporary and structural problems
There is some effect from the post-COVID inflation and the measures to fight that, but the IMF team sees those as fading, and not lasting more than another year or so. However, the biggest, most fundamental problems they found are “sluggish productivity growth” and an aging population. The first, they write, needs reforms to affect a change, and the second is only going to “accelerate sharply”.
The forecast for Germany’s labor supply is bleak, unless another war pushes more foreign men into the German workforce. The authors note that:
“Germany’s working-age population has been buoyed over the last decade by migrants escaping regional conflicts.” Greater immigration, they point out, could be a “powerful force” in stemming the problems of the ageing worker pool. “However, prospects for this are uncertain”, they write.
Combined with the lack of fresh inflows of immigrants fleeing wars, worker ageing is expected to hit Germany harder than the other G7 countries. Moreover, the ageing population is expected to increase demand for healthcare services, thus exacerbating labor shortages in industries competing with healthcare for personnel. These shortages could affect investment as well.
There are structural fixes
Germany could also increase its labor supply by making it easier for women to extend their working hours. There are 2.3 million fewer women working than men, and women are five times more likely to work part-time. Expanding access to reliable childcare and reducing taxes for secondary earners in married couples could help close these gaps.
Another solution is to raise productivity, which has been dragged down by inadequate investment in public infrastructure. Public investment declined in the 1990s and, since then, has barely been enough to offset depreciation. This puts Germany near the bottom of advanced economies in public investment. Money that has been budgeted for investment is routinely underspent, often because of staff shortages in municipalities.
The IMF team recommend making it easier for women to be a part of the workforce. Improving childcare access and lowering taxes for married secondary earners would bring more women into the workforce.
Public investment is at the bottom of the OECD league table and is on par with that of Italy and Spain. It takes 120 days, or double the OECD countries average, to get a business license. Digitalization lags as well. Removing these impediments to getting business done promises to unlock productivity, and, combined with opening the doors wider for workforce entry, can pull the German economy out of the doldrum
