The Germany economy is in a strong position, with the government expecting GDP to grow by 1.7% in 2017 and 2% in 2018. This economic buoyancy has translated into record business confidence which reached its highest level since German reunification in 1990, in July.
On a sector basis, growth increased for all but one sector in Q1,2017 compared to Q1,2016; the highest growth rates stem from the construction sector (4%), manufacturing (3.8%) and corporate services (2.6%); agriculture, forestry and fishery decreased (0.8%) for seasonal reasons.
Industrial output has also expanded for five consecutive months – marking its best run of growth since before the start of the Eurozone’s debt crisis in 2010.
German exports have also performed well in 2017. In the first quarter of the year, exports grew by 6.6% to €375.079bn. However, imports also increased by 5.6% to €316.495bn, which has resulted in a trade surplus of €58.584bn. However, in June the level of exports fell, its biggest drop for almost two years, which was attributed to the strength of the Euro.
Employment is at a 27-year high, with 43.7m people registered as employed in Q1, 2017. This corresponds to an increase of 1.5% or an additional 642,000 employed people in comparison to the same period last year. This means that the adjusted unemployment rate stands at 3.9% or 1.77 million unemployed persons, reflecting a bright economic picture.
On the whole, the economy has benefitted from a strong domestic market and low unemployment; low interest rates and a growing global economy.
While the German engine continues to drive forward, it is nevertheless at risk from several economic challenges. Any macro-economic moves towards protectionism would impact German exports – particularly in the automotive sector.
Germany has been criticised on the world stage for maintaining a strong trade and current account surplus at the detriment to its weaker neighbours. The country is also going to the polls in September for the Federal Elections. This could see several changes to the business environment if Chancellor Merkel were to lose the election.
Germany is world famous for its strong middle market. These companies provide 61% of employment in the country and account for 35% of net revenues. German small and middle sized businesses are also strongly represented in international exports where a third of revenues are currently generated. Optimism in the broader economy is also reflected in Mittelstand companies which are looking to further their economic development. Over a third (36%) expect growth for the period between 2016 and 2018, while only 15% expect a decrease.
An important driver for the Mittelstand is innovation. A study commissioned by the German Ministry for Economics in October 2016 detects a huge decrease in innovation (innovation in products and processes, not spending in research and development). The so-called “innovator rate” hit its lowest point in 2014 – the last year of the research period.
Competition through increasing globalisation, the volatile global economy, political uncertainties, demographic issues and low risk appetite of banks fail to create an environment suitable for long term investments in innovation. SME spending in innovation increased slightly – by 33% in comparison to 1995, in total numbers from €25.7bn to €34.4bn in 2016 – while spending by large companies more than tripled – increased by 349%, from €35.1bn to €122.7bn.