Too good to be true

Unfazed by Berlin’s seemingly endless struggle to form a government, economic growth in Germany hit a six-year high in 2017 – fuelling hopes of a record performance in 2018. But how long can Europe’s powerhouse keep up the pace?

German businesses and consumers started the New Year brimming with confidence, two key surveys found last month, signalling that Europe’s top economy is still capable of holding its own – even in a time of political uncertainty.

Seemingly unfazed by the fact that the September 2017 election caused a historic stalemate on German federal politics (see breakout box), the Ifo economic institute for Economic Research declared that German business morale recovered from a fleeting December dip to climb to a new record high in January. At the same time, a forward-looking survey by market research company, GfK, forecast that consumer confidence was about to hit the highest level since 2001.

“At the beginning of the New Year, it’s all hunky-dory in the German economy,” ING Diba economist, Carsten Brzeski, summarised chirpily in a media statement, echoing a much-quoted blog by Christine Lagarde, Managing Director of the International Monetary Fund (IMF), who came out saying the economic outlook for Germany was bright, with “optimism abound”.

February data by the federal statistics office confirmed the duo’s bullish outlook: Fuelled by low borrowing costs, high employment levels and a record public sector surplus of €45 billion, it said GDP growth reached 2.2 per cent during the first month of 2018, the highest since 2011. Company investments and exports, the traditional driver of Europe’s largest economy, also contributed to a positive January result, with demand for ‘made in Germany’ goods picking up steadily across the globe.

To top it off, 2018 could see up to 20 Initial Public Offerings (IPOs) in Germany alone – spearheaded by Munich-based braking specialist, Knorr-Bremse, which could be collecting up to €4 billion in capital, according to Börse am Sonntag.

But, even the longest list of positive economic news won’t be able to keep the spotlight away from Berlin for too long, Reuters analyst, Joseph Nasr, warns, saying after months spent failing to form a coalition, Germany’s political leadership needs to get back to focusing on maintaining the nation’s economic momentum. “[Good news aside,] now it is about making sure that the economic shine continues into the future,” he explains, predicting that the nation’s strong economic performance will eventually sharpen a debate about how to manage the windfall going forward.

“It is time to take action,” Nasr says. “Despite growth in 11 of the 12 years she has been in power, [Angela Merkel] is facing accusations of complacency over the economy, and economists and business lobby groups have called for an overhaul of Germany’s burdensome tax system, which some argue has inhibited private sector investments.”

Agrees IMF chief, Lagard, who blogged, “policymakers now have a unique opportunity to address the challenges facing the German economy. These are varied, but include boosting wages, investing in infrastructure and reducing the large trade surplus…Rising to these challenges is critical for Germany and for the euro area as a whole.”

As such, a key question for the new administration and a central talking point amid the commercial road transport community will be how to make best use of Germany’s strong economic position to ensure long-term growth.

After a period of running an excessively prudent budget, for example, Merkel’s conservative bloc favours cutting both corporate and household taxes to ensure a lasting upswing. Having lost a sizeable amount of votes to the far right in the September election, observers say she is also eager to send a signal to households that they, too, are left with more money in their pockets, and not just the government.

Merkel’s new coalition partner, however, is more focused on spending the surplus on social welfare, the replacement of private health insurance schemes with a new ‘citizen insurance’ solution and the admission of more immigrants – even though many economists argue there is simply no case for increased government spending in an already booming Eurozone.

At the time of writing, plans circulate that would see the majority of the €45 billion surplus spread out across everything from schools and families to housing and defence in a means to please both camps, with roughly €10 billion left to tackle big ticket items like reforming the country’s tax system.

According to Martin Wansleben, Managing Director of Germany’s DIHK Chambers of Industry and Commerce, Germany’s industrial sector would prefer seeing the surplus spent more strategically: “Above all we need less bureaucracy, more flexibility for companies and more investments in infrastructure and education,” he says. “Tax relief for companies – and absolutely no way tax increases – are part of a good economic package.”

A ‘good economic package’ would likely also have to explain how the new government is planning to manage Germany’s transition into the digital era and preserve the country’s competitiveness beyond the current boom. The transport and logistics industry is especially under pressure in that context, and will likely play an important role in the public debate once a formal government is in place.

According to a report by Research & Markets, the logistics industry is projected to contribute some 21 per cent to national GDP growth by 2025, compared to eight per cent in 2017 – raising the question whether or not the sector’s rising budgetary importance is taken account for in the current political debate, and whether or not Germany’s political elite is prepared for the rise of innovative logistics solutions, electro-mobility and digitisation. Any new government will ultimately have to seek make that shift a priority, analysts argue, ideally in conjunction with a more holistic infrastructure reform.

The latest coalition agreement that circulated in early February, however, doesn’t seem to convince on either front. According to Ifo President, Clemens Fuest, it lacked “ambition and direction” both with view to tax cuts and investment for research, infrastructure or education. “A truly bold policy agenda would require the new government to focus on specific priorities and accept that not everyone can get what they want,” he summarises.

“Rather than tweaking the margins in a futile attempt to please everyone, the government would set its sights on deeper structural reforms, to lay the foundation for future growth and stability. Now is the time to start preparing Germany for its future challenges.”

Fast Fact

According to Gary Beecroft, CEO of UK firm, CLEAR Consulting, German trailer registrations reached 58,000 units in 2017, the third highest figure ever recorded. “However, despite a reasonable economic outlook for Germany and most of Western Europe, CLEAR does not believe the trailer market will go higher in 2018,” he says, adding there will be a “slight downward correction” in 2019.

Fast Fact

According to Dr Klaus P. Strautmann, CEO of German OEM, Langendorf, which was taken over by Poland’s Wielton in May 2017, the German market proved less volatile in 2017 than it did in 2016, despite ongoing political confusion. While Langendorf itself reported a ‘stable’ order intake, the company did note a decrease in insulated tipper sales, arguably because demand has been met following a law change in 2015 that required insulation for tippers used in road construction. The drop was balanced by a spike in low loaders, however. “We expect a very stable market in 2018,” Strautmann says. “The economy is going strong and demand for reasonably priced, modern equipment that can be delivered with minimal lead time is still high.”

Fast Fact

After inconclusive elections in September 2017 saw Angela Merkel’s conservative bloc bring in the worst result since 1949, and the right-wing Alternative for Germany enter the Bundestag for the first time, it took Germany a record four months to form a functioning government. Initial efforts to end the paralysis collapsed spectacularly in November, when the liberal FDP party pulled out of talks on forming an unprecedented three-way coalition with Merkel’s conservatives and the environmentally focused Greens. Since then, Angela Merkel has successfully persuaded a reluctant Social Democratic Party (SPD) to revive the left-right ‘grand coalition’ that governed Germany during the last four-year parliament – but not without making substantial political sacrifices.