Blog Post

Germany’s post-pandemic current account surplus

The pandemic has increased the net lending position of the German corporate sector. By incentivising private investment, policymakers could trigger a virtuous cycle of increasing wages, decreasing corporate net lending, which would eventually lead to a reduction of the economy-wide current account surplus.

By: and Date: October 21, 2021 Topic: European governance

In 2019, Germany ran a current account surplus of $290 billion, the largest in the world. Germany’s current account surplus is persistently large: from 2011 to 2020, it never dropped below 6% of GDP and remained above 7% for six consecutive years (from 2014 to 2019, see Figure 1). Such levels are highly unusual for a country in the western world as was pointed out back in 2018.

As a consequence, Germany’s international investment position (the difference between the external financial assets and liabilities of residents of a given country) has consistently increased over the same period, reaching €2.1 trillion in the second quarter of 2021 or 61% of GDP.

Much of the current account increase is due to the corporate sector

Looking at a sector-level breakdown of the economy-wide net lending position (Table 1) provides information on the sectoral composition of the increase in the current account balance. From 1998 to 2016 (the year with the largest current account surplus position as a % of GDP), the economy’s total net lending position (as a % of GDP) increased by 9.4 percentage points. The increase in this period was due to increases in the non-financial corporate sector (+ 3.4 pp) and general government (+3.8 pp) and to a lesser extent households’ net lending position (+1.8 pp). This somewhat contradicts the often-stated claims that Germany’s current account surplus has been driven by thrifty households. The increase in the corporate sector is particularly unusual, resulting in it becoming a net-provider of funds to the economy (companies are usually net borrowers).

The increase in the corporate net lending is a result of both, an increase in corporate savings (Jüppner (2021)[1]) and a decrease in investments.

[1] Jüppner, Marcus (2021) “Determinants of Corporate Savings in Germany” Jahrbücher für Nationalökonomie und Statistik

Between 2016 and 2019, the unusual situation of having a strong net-lending corporate sector changed notably, with the net lending position of non-financial corporations falling from 2.4 to 0.3% of GDP due in part to a pickup of investment in the manufacturing sector and a fall in the sector’s net savings.

The pandemic had a negative impact on corporate investment and household borrowing. This resulted in a sharp increase in the net lending position of both non-financial corporations (+2pp) and households (+3.5pp).  Conversely, the net lending position of the General government decreased by 5.8 pp in a single year. In other words, government measures were strong enough to more than offset the increase in net lending of the private sector, resulting in a slight decrease in the total economy’s net lending position (-0.8pp).

What is more surprising is that, according to AMECO forecasts, the net lending position of the corporate sector is set to remain very high in 2022, hinting that the unusual situation of net lending companies in 2016 could, in fact, be the new norm in the German economy. Could this indicate that the 2016-2019 pickup in corporate fixed capital formation was only temporary? Notably, preliminary numbers from the Federal Statistical Office indicate that capital formation for machinery and equipment in the entire economy during the first two quarters of 2021 remains below pre-pandemic levels (Figure 2).

An overall lack in investment

The overall low level of investment by the corporate sector in Germany has already been the subject of a previous blog post. The growth of the real net capital stock since the beginning of European monetary union in 1999 has been very slow in Germany (23%) compared to the United States (69%) or France (47%). Over the past couple of years, nothing indicates Germany is catching up with the growth rates of peers (Figure 3).

For example, in the manufacturing sector, Germany has been investing significantly less (as a share of value added) than France, Italy or the United States throughout most of monetary union (Figure 4). Despite a notable increase in the years leading up to the pandemic (2.4pp between 2016 and 2019), post-pandemic numbers and forecasts mentioned above suggest that such an increase may only have been transitory. Meanwhile, investments in the services sector have remained flat in recent years.

When breaking the numbers down by type of investment, investment in intangible capital has been significantly weaker in Germany than in France or the US and slightly lower than in Italy. Despite a very slight increase between 2013 (9.9% of value added) and 2016 (10.3%), investment in intangible capital does not seem to be picking up.

Conclusions

As talks to form a ‘traffic light’ coalition continue, it is crucial that policy makers do not lose sight of the critical importance of private sector investment to the German economy. An important reason for the high and often criticised current account surplus is insufficient corporate investments. As employment grew substantially, capital investments did not keep up leading to a stagnating capital-labour ratio. The relatively muted wage developments in Germany compared with peers may partly reflect lack of investment dynamics, which ceteris paribus should raise labour productivity. The incoming German government should reflect on how it can ensure increasing investments, especially in the corporate sector. Measures to incentivise investments in intangible capital should be considered. The incoming German government thus has an opportunity to trigger a virtuous cycle between increasing investments, higher minimum wages, lower corporate net lending and eventually a falling current account surplus. That virtuous cycle could be triggered by a combination of improving investment conditions and modernising the German infrastructure on the one hand and higher minimum wages on the other.

Recommended citation:

Guetta-Jeanrenaud, L. and G. Wolff (2021) ‘Germany’s post-pandemic current account surplus’, Bruegel Blog, 21 October


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.

Read article More on this topic More by this author
 

Parliamentary Testimony

Dutch Parliament

The future of the stability and growth pact

Testimony given to a Tweede Kamer der Staten-Generaal roundtable discussion on the future of the stability and growth pact.

By: Guntram B. Wolff Topic: Dutch Parliament Date: November 24, 2021
Read article More by this author
 

Blog Post

Fiscal arithmetic and risk of sovereign insolvency

The record-high debt levels in advanced economies increase the risk of sovereign insolvency. Governments should start fiscal consolidation soon in an environment of low nominal and real interest rates and post-COVID growth.

By: Marek Dabrowski Topic: Global economy and trade, Macroeconomic policy Date: November 18, 2021
Read about event More on this topic
 

Past Event

Past Event

Covid recovery and the green transition: What can promotional banks do?

What is the role of promotional banks in financing the green transition?

Speakers: Sophie Barbier, Maria Demertzis, Ricardo Mourinho and Lucinio Muñoz Topic: Green economy Date: November 18, 2021
Read article Download PDF More on this topic
 

Book/Special report

European governance

Instruments of a strategic foreign economic policy

Study for the German Federal Foreign Office produced by Bruegel, the Kiel Institute for the World Economy and DIW Berlin.

By: Katrin Kamin, Kerstin Bernoth, Jacqueline Dombrowski, Gabriel Felbermayr, Marcel Fratzscher, Mia Hoffmann, Sebastian Horn, Karsten Neuhoff, Niclas Poitiers, Malte Rieth, Alexander Sandkamp, Pauline Weil, Guntram B. Wolff and Georg Zachmann Topic: European governance Date: November 12, 2021
Read article Download PDF More by this author
 

Parliamentary Testimony

European governanceFrench Senate

European Union countries’ National Recovery and Resilience Plans: A cross-country comparison

Testimony before the Economic Affairs Committee of the French Senate.

By: Simone Tagliapietra Topic: European governance, French Senate, Macroeconomic policy Date: November 12, 2021
Read about event More on this topic
 

Past Event

Past Event

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Petra Geraats, Wolfgang Lemke, Francesco Papadia and Massimo Rostagno Topic: Macroeconomic policy Date: November 4, 2021
Read article More by this author
 

Opinion

European governance

Can EU fiscal rules jump on the green bandwagon?

By and large, setting a new green golden rule would be a useful addition to the existing EU fiscal framework.

By: Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: October 22, 2021
Read article
 

External Publication

European Parliament

Tailoring prudential policy to bank size: the application of proportionality in the US and euro area

In-depth analysis prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Alexander Lehmann and Nicolas Véron Topic: Banking and capital markets, European Parliament, Macroeconomic policy Date: October 14, 2021
Read article More by this author
 

External Publication

Global Economic Resilience: Building Forward Better

A roadmap for systemic economic reform calling for step-change in global economic governance to increase resilience and build forward better from economic shocks, prepared for the G7 Advisory Panel on Economic Resilience.

By: Thomas Wieser Topic: Global economy and trade, Macroeconomic policy Date: October 14, 2021
Read article More on this topic More by this author
 

Opinion

Letter: Declining investment may explain why rates are low

Perhaps an analysis of the causes of the declining investment rate would bring us closer to explaining why real interest rates are so low.

By: Marek Dabrowski Topic: Macroeconomic policy Date: October 1, 2021
Read article More on this topic More by this author
 

Opinion

What Evergrande signals about China's economic future

Under Xi Jinping's new economic agenda 'common prosperity', China is cracking down on indebted real estate developers like Evergrande.

By: Alicia García-Herrero Topic: Global economy and trade Date: September 30, 2021
Read article More on this topic
 

Blog Post

German elections: seizing the moral and economic opportunity of global health security

The new German government should play its part in global health security and preparedness.

By: Amanda Glassman and Guntram B. Wolff Topic: Global economy and trade Date: September 24, 2021
Load more posts