Blog Post

Germany’s current account surplus and corporate investment

Following the 1990s post-reunification period and since the beginning of monetary union, Germany's current account has grown substantially. In the crisis years, Germany’s lost about 15 percentage points of GDP in its external investments, but the position continues to grow nevertheless. What are the drivers behind Germany’s current account surplus?

By: Date: May 9, 2018 Topic: European Macroeconomics & Governance

This blog post is a chapter of the e-book “Explaining Germany’s Exceptional Recovery” edited by Dalia Marin.

Germany’s current account surplus is unusually, and persistently, large. It was above €250 billion euros in 2017, the third consecutive year with a current account surplus above 7.8% of GDP (IMF 2017). To put this into context, of the 193 countries listed in the IMF’s World Economic Outlook between 1999 and 2017 (totalling some 3,570 available observations of current accounts), there were only 238 episodes of three consecutive surpluses of more than 7.8% of GDP. Among those 238, the vast majority were countries that are either raw material and/or oil producers, with only a handful of countries other than raw material producers.[1]

Following the 1990s post-reunification period, during which Germany ran a slightly negative current account, and since the beginning of monetary union, the current account has grown substantially. One difficulty in analysing Germany’s current account is that German reunification was a substantial shock that lowered the country’s traditional current account surplus as far as into negative territory. The numbers given below start with monetary unification, but also reflect the gradual phasing out of the reunification effects.

With persistent large current account surpluses, Germany became a large creditor: its net international investment position is now above 50% of GDP. In the crisis years of 2007-2011, Germany’s lost about 15 percentage points of GDP in its external investments, but the position continues to grow nevertheless.[2]

According to the IMF’s External Balance Assessment analysis for 2016, only around half of the current account surplus can be explained by fundamentals such as productivity and an ageing population.[3] Although these estimations are controversial, it seems evident that there is a further need to explore the drivers behind Germany’s current account surplus.

The corporate sector is behind increase in current account

National accounting allows the current account to be broken down into the difference between the saving and the investment of all domestic sectors of the economy (i.e. the net lending of all domestic sectors). Table 1 breaks down the increase in Germany’s net lending from 1999 to 2016.[4] It increased by more than 9 percentage points of GDP, with by far the largest contribution coming from the non-financial corporate sector, followed by government, and only then by households. Meanwhile, the financial sector itself has turned to a slight borrowing position.

Contrary to often-stated claims, then, it is not German households that have driven the increase in Germany’s current account. They have not become even thriftier because of ageing, not least because demographic profiles don’t change that much in the course of 18 years. Instead, the dynamics of the current account increase are a reflection of a profound change in the net lending behaviour of companies located in Germany.

Corporate savings are up…

What, then, is behind this changing behaviour in corporate net lending? National account data show that the 5 percentage point shift in the corporate net lending position is due to both an increase in gross savings (around 3 percentage points of GDP) and a decrease in corporate investments (around 2 percentage points of GDP). The increase in gross savings up to 2007 can be traced back to a fall in the compensation of employees (Ruscher and Wolff 2013). After this, the trend seems to reverse and a lower interest burden on property seems to have increased savings, while employees’ compensation has been slowly recovering. The gross operating surplus increased up to 2017, but then reversed to some extent. Overall, the German corporate sector has been deleveraging for more than 15 years.

…and corporate investment is weak

To better understand these macroeconomically significant movements, the figures below put key German developments into perspective with three international peers: France, Italy, and the US. The 2 percentage point fall in corporate investment has had profound effects on Germany’s capital stock relative to these peers (Figure 1).

Investment has been disappointing in both the manufacturing and the services sector (Figure 2). It is notable that throughout the monetary union period, Germany has been investing less in manufacturing than both Italy and France. And only with the crisis of 2008 has Italy’s investment in the service sector fallen substantially below that of Germany, while France has invested more in the sector than Germany almost continuously throughout monetary union.

Figure 2 Gross fixed capital formation (% of gross value added)

Note: Services comprises NACE sectors J-K and M-N.

Source: Eurostat, national accounts.

In addition to looking at the sectoral decomposition of investment, one can also study the type of investment – i.e. tangible versus intangible. Intangible investment in particular has been weak in Germany compared to France and the US, but even compared to Italy.

Note: Business sector includes NACE codes A-N (excl L) plus R and S; Intangible (NA) GFCF is intangible investment included in the national accounts (Eurostat and BEA definition = Intellectual property products); Intangible (not NA) comprises intangible GFCF not included in the national accounts and is based on INTAN-Invest estimations.

 

Meanwhile, German employment has performed extremely well compared to its peers (Figure 4). The end result has been that Germany’s capital-to-labour ratio has increased least among all four peers. Compared to the US and France, the gap that has built up amounts to 15-25%.

 

Conclusions and policy implications

In this chapter, I have shown that Germany’s current account is highly unusual and that it is driven by the corporate sector and, to a certain extent, by the government sector. In the corporate sector, savings have gone up with initially falling labour compensation, while corporate investment has been falling and weak throughout. Three major conclusions can be drawn from this empirical picture.

  • German and European policymakers should pay full attention to Germany’s current account. To dismiss it as ‘irrelevant’ or ‘outside the control of policymakers’ is to belittle a highly unusual phenomenon that most likely is the result of something going badly wrong.
  • It is important to dismiss outright wrong explanations of the current account. An ageing population cannot explain the massive increase in the current account – the increase has not resulted from the household sector, and nor has the demographic profile changed much. Neither can the decline in corporate investment in Germany be explained by a rise in foreign direct investment, which was 2.4% of GDP in 1999 and 0.7% in 2016, while net FDI into Central and Eastern Europe remained pretty flat at around 0.2% of GDP. Also, references to the common monetary policy and the weak exchange rate are not helpful. While it is true that Germany would have seen the Deutsche Mark appreciate in the current situation, the euro area’s monetary policy cannot target Germany’s current account. Instead, it would be natural to start by looking at the corporate sector directly.
  • In contrast, the weakness of manufacturing and intangible investment compared to peers is notable. A lack of investment will put the brakes on wage growth if capital and labour are complements, as the empirical literature suggests (Lawrence 2015). Conversely, low wage growth reduces the need to increase capital investments. The increase in German employment, the weakness of investment, and the fall in the labour share are therefore probably connected, as suggested by Berger and Wolff (2017).

This overall picture calls for a detailed and careful policy analysis, which the incoming German government should undertake. A few suggestions can be made. Beyond the need to drive up public investment (see Fratzscher et al. 2016), the German government should put a strong focus on increasing corporate investment. Increasing the currently low intangible capital stock should be a key priority. The data presented here suggest that the political narrative that Germany has missed the Digital Revolution has some truth to it. But regular investment is also weak, as the data on manufacturing investment have shown. To improve investment conditions in Germany, the country could revisit the regulatory toolbox – the lack of any significant supply-side reforms for at least eight years is notable in this regard. Moreover, at a time when the US has just passed a major corporate tax reform, which also increases tax incentives for investment, it is absolutely crucial for Germany to focus on improving tax conditions for investment. In doing so, the capital stock is likely to increase, allowing Germany to catch up to its peers. A higher capital-to-labour ratio should also increase wage growth further. With such policy measures, Germany’s current account surplus would be set to fall.

References

Berger, B and G B Wolff (2017), “The global decline in the labour income share: is capital the answer to Germany’s current account surplus?”, Bruegel Policy Contribution 12/2017.

Fratzscher, M, M Gornig and A Schiersch (2016), “Weak Corporate Investment Requires Immediate Action”, DIW Economic Bulletin 15/2016: 167-171

IMF (2017), World Economic Outlook, October.

Lawrence, R Z (2015), “Recent Declines in Labor’s Share in US Income: A Preliminary Neoclassical Account”, NBER Working Paper No. 21296

Ruscher, E and G B Wolff (2013), “Corporate balance sheet adjustment: stylized facts, causes and consequences”, Review of Economics 64: 1-21 (earlier version available as Bruegel Working Paper No. 2012/03).

 

[1] If one excludes raw material and financial services producers, there are five countries with 3-year current account surplus (>8%) that are not raw materials exporters, mineral fuels exporters or financial hubs: Germany, China, Macao, Botswana, and Suriname. The exclusion criteria are: (1) mineral fuels exports as share of GDP > 10% (OPEC membership for countries with missing data); (2) raw materials exports as share of GDP > 5%, (3) financial services exports as share of GDP > 25%; and (4) financial services exports as share of world trade in financial services > 5% (necessary to exclude Hong Kong)

[2] The number is calculated as the gap between the accumulated current account surpluses and the actual NIIP.

[3] For details, see http://www.imf.org/external/np/res/eba/data/EBA-Tables-2016.pdf

[4] Data for 2017 are not yet available, but the first two quarters of 2017 seem to indicate a decrease in corporate net lending.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Opinion

Expect a U-shape for China’s current account

As the US aims to reduce it's bilateral trade deficit, China's current-account surplus is back in the headlines. However, in reality China’s current-account surplus has significantly dropped since the 2007-08 global financial crisis. In this opinion piece, Alicia García-Herrero discusses whether we should expect a structural deficit or a renewed surplus for China's current-account.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 28, 2019
Read article More on this topic More by this author

Blog Post

The latest European growth-rate estimates

The quarterly growth rate of the euro area in Q1 2019 was 0.4% (1.5% annualized), considerably higher than the low growth rates of the previous two quarters. This blog reviews the reaction to the release of these numbers and the discussion they have triggered about the euro area’s economic challenges.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance Date: May 20, 2019
Read article More on this topic

Blog Post

Germany’s even larger than expected fiscal surpluses: Is there a link with the constitutional debt brake?

Germany is having a political debate on the adjustment of its budgetary plans due to revised forecasts, and an academic debate on the debt brake. Yet, since 2011, general government revenues and surpluses have been systematically and significantly higher than forecast. The German surplus reached 1.7% of GDP in 2018. This bias did not exist from 1999-2008 before the introduction of the debt brake. While the IMF also got its forecasts of German surpluses wrong, the extent of the bias is larger for the German government’s forecasts. These data suggest that the political debate should focus on the debt brake and its implementation rather than on how to close the budgetary ‘hole’.

By: Catarina Midoes and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: May 13, 2019
Read article More on this topic More by this author

Blog Post

Why China's current account balance approaches zero

China’s current account is projected to be balanced within the next few years. Observers disagree whether this is due to structural factors or Chinese policy. We review their assessments of the Chinese saving and investment situation and what this implies for the future.

By: Michael Baltensperger Topic: Global Economics & Governance Date: April 15, 2019
Read article More by this author

Opinion

New EU industrial policy can only succeed with focus on completion of single market and public procurement

France and Germany recently unveiled a manifesto for a European industrial policy fit for the 21st century, sparking a lively debate across the continent. The fundamental idea underpinning the manifesto is a good one: Europe does need an industrial policy to ensure that EU companies remain highly competitive globally, notwithstanding strong competition from China and other big players. However, the Franco-German priorities are unsuitable for the pursuit of this goal.

By: Simone Tagliapietra Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: March 18, 2019
Read article

Opinion

What can the EU do to keep its firms globally relevant?

There is a fear that EU companies will find it increasingly difficult to be on top of global value chains. Many argue that EU-based firms simply lack the critical scale to compete and, in order to address this problem, that Europe’s merger control should become less strict. But the real question is where the EU can strengthen itself beyond the realm of competition policy.

By: Georgios Petropoulos and Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: February 15, 2019
Read article More on this topic More by this author

Opinion

The great macro divergence

Global growth is expected to continue in 2019 and 2020, albeit at a slower pace. Forecasters are notoriously bad, however, at spotting macroeconomic turning points and the road ahead is hard to read. Potential obstacles abound.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: December 5, 2018
Read article More on this topic More by this author

Opinion

Plädoyer gegen eine Politik der Scheinlösungen

Der Daueraufschwung verdeckt, dass Deutschland für die nächste Krise schlecht gerüstet ist. Und das Zeitfenster für Reformen schließt sich.

By: Jochen Andritzky Topic: European Macroeconomics & Governance Date: October 31, 2018
Read article Download PDF More on this topic More by this author

External Publication

LNG and Nord Stream 2 in the context of uncertain gas import demand from the EU

Georg Zachmann sees the development of import demand for natural gas in the EU as uncertain. In case of strongly increasing import demand, both Nord Stream 2 and liquified natural gas imports could contribute to ensure European supply.

By: Georg Zachmann Topic: Energy & Climate Date: September 27, 2018
Read article More on this topic More by this author

Opinion

Wir brauchen gezielte Migration für unsere Renten

Deutschland benötigt die geordnete Zuwanderung produktiver Arbeitskräfte aus dem Ausland. Um diesen Prozess besser zu steuern, will die Bundesregierung nun ein Fachkräfteeinwanderungsgesetz auf den Weg bringen.

By: Jochen Andritzky Topic: European Macroeconomics & Governance Date: August 22, 2018
Read article More on this topic More by this author

Opinion

Germany’s Government Still Has an Allergy to Investing

The new coalition budget looks a lot like the old German coalition budget.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: July 23, 2018
Read article

Blog Post

Germany’s savings banks: uniquely intertwined with local politics

German savings banks, known as Sparkassen, form an important feature of the country's banking assets. Unlike in other European countries, German Sparkassen also hold direct links with local political communities. This post focuses on the Sparkassen's structural links and relationships with elected politicians. Three findings which do not appear to have been specifically documented previously stand out.

By: Jonas Markgraf and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 18, 2018
Load more posts