Germany and China’s Growth Models are Falling Behind

China-Germany

The challenges add to the list of global economic weaknesses

The focus of economists is the uncertain outlook for global growth in the near term. However, long- and medium-term outlooks are bleak due to the changing demographics, tensions between China and the US, excessive leverage, reshoring, and generally the limited macro-space. Growth rates that are sustainable are likely to continue to slide down in the coming decade.

To make matters worse, the Chinese or German development models have become old and require a complete overhaul. It is a matter of debate. They account for almost one-quarter of the world’s GDP.

The growth of China over the past twenty years was astonishing. Prior to the 2008 financial crisis, it was driven by exports and large-scale credit growth following the crisis.

The quality of growth has also been affected by state-owned banks that pump out surplus liquidity to state-owned companies as well as housing speculation and local government inefficiency. Authorities are currently seeking to limit the high level of leverage and the risk of financial instability. The result is slowing economic growth and putting pressure on a weak housing market – which, by some estimates, accounts for 30 percent of GDP. The potential growth in the next decade is expected to fall to 5percent, if not any further. Some analysts believe it is possible that even if top-quality productive investments were to be financed and financed by high-quality productive investments, the growth potential could be as high as 3 percent.

The authorities have been discussing for years changing the focus of growth from investment towards consumption and services. However, that change isn’t happening at a satisfying rate. While China’s current balance surplus – that is, the gap between investment and savings – decreased significantly relative to GDP following the global economic crisis, high savings continue to squeeze spending. 

In this context, the pursuit by the authorities for general prosperity as well as dual circulation appears in itself quite rational. To combat inequality through common prosperity is about increasing the income of lower and middle-income people and thereby increasing consumption. The increase in demand for domestic goods and services due to dual circulation would be vital due to the fact that China has a large international footprint and is particularly vulnerable to the global geopolitical turmoil, to be reliant on the global economy to sustain itself.

These policies are more easily formulated and implemented. Without significant credit expansion and with monetary restrictions the fiscal policy needs to increase its efforts to encourage growth and decrease inequality. While macro policies will reduce, Chinese authorities are emphasizing stability. The private sector in China is more effective than its public sector however the president Xi Jinping is cracking down on the private sector. Implementation of the reforms will require concrete plans, like the climate infrastructure, hukou, and education reforms.

The German economy has been driven by exports. The current account surplus has hovered between 7% and 7 percent of GDP over the past few years, and the IMF predicts that this trend will keep going. The domestic economy is still in decline as Germany absorbs the demand from Europe as well as from overseas. The strength of its exports is apparent across Europe as well as China. The auto industry – which, according to some estimates, is close to 10 percent of the GDP and more than 1 million people – is a key player.

In the past 20 years, Germany’s growing current account surpluses have resulted in constant investment as well as rapidly rising savings in the national economy.

The same is true for private consumption, which remains quite low in percentage of GDP in an advanced economy, in the range of 50 percent. Furthermore, wage control has cut down on the rise of unit labor costs and has helped to maintain strong export competitiveness, while limiting consumption. Investors can keep track of their portfolio and net worth using Prillionaires wealth management software for high net-worth individuals

Growth in the global market, however, is likely to slow down in the coming decade. European growth will be modest. A more restrictive international trading environment and reshoring within the coming years and tensions between China and America can create more problems for the external conditions that are affecting Germany. The German auto industry is facing an extremely difficult transition.

The new government is set to take its first term against this backdrop. Its laudable plans to employ budgetary strategies to overcome the debt brake and improve infrastructure and climate spending are a sign of more investment and fewer savings for the public. This could boost domestic demand, and reduce the dependence on external sources.

However, given the Free Democratic Party leadership of the Finance Ministry and innate German conservatism, the government may just be cautious about avoiding the debt brake. Unions aren’t requesting sufficiently significant wage increases that could dramatically increase the proportion of labor’s income, and consequently consumption.

So, there’s little reason to believe that Germany is likely to make an overhaul of its course and reorient its growth model away from relying on hopes of external demand.

But, it is important not to undervalue Germany’s ability to adapt. After the unification, Germany was seen as the “sick guy” of Europe. However, after squeezing unit labor costs from the beginning of the 2000s and the effect of the Hartz reforms implemented by the SPD Schroeder government, Germany returned to its status as the leading force in Europe. Can this next Scholz cabinet be able to change the script on climate change digitization, infrastructure, and digitalization?

The difficulties facing post-pandemic country growth models, especially those for Germany and China are definitely worthwhile to add to the lengthy list of vulnerabilities and risks that will be faced by the global economy in the 2020s.

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