German Economy Watch: Germany - Keeping People at Home?

Wednesday, May 14, 2008

Germany - Keeping People at Home?

by Claus Vistesen

Following up on a point I mentioned about international migration in my previous post on global demographics (where I reviewed a recent paper by David S. Reher) I would like to briefly examine some of the issues raised in a German context. In my post I latched on to a point made by Mr. Reher about how some low fertility countries might see adverse effects from exporting surplus labour to other countries. The argument was specifically centered on East european transition economies but, as you will see in what follows, the argument can also be expanded. The main issue becomes one of rearranging those proverbial deck chairs on the Titanic (i.e. to get the best spot relative to watching the inevitable demise of the ship) as many countries across the globe seek to mitigate a labour dearth by importing foreign labour. The allure of such policies should not be neglected. Relative to actually doing something about the underlying issue (i.e. nudging fertility back up) receiving foreign labour becomes an immediate, if only temporary, fix for labour shortages and even in some cases the source of unprecedented economic booms (Spain would be an excellent example here). In this present context it might serve us well to take a trip to Germany and do so by looking at an eloquent piece in the IHT (aggregated from Reuters) by Erik Kirshbaum. As Kirshbaum neatly points out we all know that Germany is hard at work trying to ramp up its industry and export its pension and health systems out of economic trouble but is also, as it were, exporting itself into even deeper trouble in another department - the human capital one. Basically, it is one thing shipping off semi-conductors and cars, but it is quite another to ship out human capital, since the latter is becoming an increasingly scarce resource in Germany.

Still plagued by high unemployment owing to the turmoil of reunification in 1990 and rigid labor laws, Germany has been helping its skilled and less-skilled jobless workers match up with foreign employers searching for manpower. The country has also been offering financial support to cover moving and transportation costs for unemployed Germans searching for jobs across the European Union, and even as far away as Australia and Canada. In one typical example, a newspaper in Fuerteventura, one of the Canary Islands of Spain, was recently filled with advertisements placed by Germans hunting for jobs.

"German seeks job in hotels or tourism," read one. "All relocation and travel costs paid for by German Labor Office."

Germany had an unemployment rate of 8 percent in February, about one percentage point higher than the euro zone average: 3.6 million people in the country are without jobs and more than 155,000 Germans emigrate each year. Many thousands have been helped by the Labor Office's International Placement Service in Bonn, which offers to some "Mobilitãtshilfe" (mobility assistance) or a "Mobilitãtsprãmie" (mobility bonus). The financing, known as the "Mobi," helps cover moving and travel costs for jobless Germans and their families. It is discretionary and aimed at those with job prospects abroad, although it is also available for relocations inside Germany.

"The mobility assistance benefits can be used for moves to anywhere in the world," said Sabine Seidler, spokeswoman for the International Placement Service in Bonn. "They're granted on a case-by-case basis and there's no upper limit on the sum involved. Applicants usually must have a contract and meet certain criteria. The main purpose is to help those who've lost their jobs find work as quickly as possible."

Now here on Demography Matters we have previously tried to draw attention to the worrying rend in net German migration. Back in May 2007 we cited the last available report from the Federal Statistics Office which showed that

"......on the basis of provisional results, 662,000 persons in-migrated to Germany in 2006 and 639,000 persons out-migrated. This results in net inward migration of 23,000 persons. That was 46,000 in-migrations less and 11,000 out-migrations more than in 2005. Consequently, net inward migration decreased strongly from the previous year (–71%), following a decrease by just 4% from 2004 to 2005. So there is a net inward balance of migrants in 2006 of 23,000. "

In view of the significant ageing process which is taking place in Germany this steady decline in the net balance is indeed preoccupying. Germany is currently a long long way from making up for all those "missing births" with inward migration. We have previously commented on this situation on DM a number of times (and here). We also cited an article from the Financial Times which gave some indication of the impact the absence of substantial inward migration was having on some sectors of the German economy:

Germany’s decision to restrict the working rights of east Europeans is hitting consumers where it hurts – their asparagus steamers. After this year’s warm, wet spring, the sandy plains of central Germany should have yielded an asparagus vintage for the history books. Instead, entire fields of the delicacy are rotting unplucked. Farmers, politicians and economists are scrambling for an explanation. At the Federal Statistical Office, which charts the amount produced in the country, experts are warning about a paradoxical year, with a harvest below the record 82,000 tons registered in 2005 despite better growing conditions.

Everyone agrees on the reason; there is a shortage of pickers. The 300,000 foreign seasonal hands, mainly Poles, who normally work the three-month “Spargelsaison” seem to have better things to do this year...... Herbert Buscher, economist at the IWH research institute in Halle, agrees that Germany, whose booming economy is now suffering from drastic shortages of workers in certain sectors, has “shot itself in the foot with its restriction to the free movement of workers”.

However what we now need to note is not only that Germany has unwisely beeen placing restrictions on the free movement of fellow EU workers into its labour market, it has also been operating a policy of helping people to find work abroad and, perhaps much more worryingly, it still seems to be encouraging this process. Re-locations inside Germany are of course one thing but actually helping people to leave Germany seems to be extraordinarily ill-advised at this point. Obviously, we can all see how it helps "beef-down" the unemployment statistics but as a long term policy it is anything but sound. Some however, are now beginning to sound the alarm ...

In Germany, the assistance is controversial. Economists and industry leaders say paying people to leave a country with a shrinking population and one of the lowest birth rates in the world is a recipe for disaster. Shortages of skilled labor are now acute in industries like engineering and car production, but they also loom in sectors like retailing, health care and finance. Meanwhile, "depopulation" has become an explosive issue in some areas, especially in the formerly Communist east.

"It's obviously better if they find work in Germany and pay tax, as well as contribute to the state's social welfare system," said Werner Eichhorst, deputy director of labor policy at the Institute for the Study of Labor in Bonn.

"In the short term, emigration takes people off jobless rolls, but in the long term we're losing workers with skills," he said. "It's usually the best and most flexible who leave. They're also often at ages where they have children. They're lost to Germany and obviously their children won't contribute later either."

The article also quotes Deutsche Bank's chief economist Norbert Walter for saying that even though he formally supports the mobility aid Germany should try kick it into reverse. Specifically Walter mentions how Germany will need to attract a significant amount of immigration in the coming years to compensate for the decline in the labour force. Right on cue Mr. Walter. Unfortunately, with Germany's size and the region's demographic trends (e.g. in Eastern Europe) this is going to be anything but the trifle Mr. Walter seems to think. Essentially, I don't think I can express myself much clearer than this. Germany desperately needs to instigate a sound policy on migration. The current one which in some ways encourages skilled labour to leave is way past its time and peak.

Update

We are incorporating the following three additional charts to accompany the discussion in comments.

(please click on images for better viewing)

Further the newspaper Frankfurter Allgemeine Zeitung reported on Friday 25th April that the German government has decided not to open its doors to East European workers till the second half of 2011 - the very last date possible under the EU Accession Treaty for the new members. This would seem to indicate that far from addressing its demographic problem Germany is at present moving backwards on it.

The executive committee of the conservative Christian Democrats (CDU) approved pushing the deadline on opening Germany's borders back two years, from 2009, committee member Karl-Josef Laumann told the Frankfurter Allgemeine.

"The extension has been decided," Laumann said.

In 2005 Germany persuaded Brussels to allow it to impose restrictions until 2009 because of fears that a flood of cheap labour would put Germans out of work.

The newspaper reported that both the CDU and their junior partner in the German parliament's ruling coalition, the center-left Social Democrats (SPD), were in favour of the extension. German Labour Minister Olaf Scholz, of the SPD, expressed support two months ago, while German Chancellor Angela Merkel has said she could not imagine opening the borders prior to 2011.

The Financial Times also had an article recently reporting on a study by the consultants McKinsey who warn that more than 10m Germans could fall into poverty by 2020 because of insufficient economic growth. Assuming annual gross domestic product growth of 1.7 per cent, those earning between 70 per cent and 150 per cent of the average income – the standard definition of the middle class – will constitute less than half the German population by 2020, compared with 54 per cent today, according to McKinsey. Of course this is assuming sustained economic growth at an average of 1.7% per annum on average, which may be a questionable assumption. Anything less than this number and the problem, of course, will be greater. Gross domestic product in Germany rose by only around 1.4 per cent in the decade to 2006, 2007 was a very exceptional year since global trade grew at record rates thus giving a huge boost to german exports, and it now remains to be seen what sort of annual growth Germany can produce during an economic downturn.

“In recent years, the German growth model has relied almost exclusively on productivity gains,” the authors of the McKinsey report write. “Given the new challenges, this concept is now reaching its limits.” McKinsey also warns the government against short-term measures aimed at boosting income and consumption. Only structural steps, the study says, can raise annual GDP growth to 3 per cent – the level it says is required for standards of living to stabilise. The consultancy blames Germany’s poor long-term economic prospects on slowing productivity gains, falling working times, a shrinking working population and a failing education system.

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Germany At A Glance, January 2008

Welcome to the German Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data and which we hope will help the first time reader better assess and get to grips with the argument being presented here. The big question which arose concerning the Germany economy in 2007 was whether or not the new found dynamism in German economic activity constituted some form of remaissance, and formed part of a global decoupling process whereby a sustainable recovery in domestic demand was taking place. Analysts on this blog never really accepted this view. The key question and central enigma associated with the German economy is really why domestic demand should have remained so congenitally weak over such a considerable period of time. Since this phenomenon is also to be observed in the the two other societes with very high (circa 43) population median ages - Italy and Japan - we postulate that demographics and population ageing processes offer some part of the explanation here. Basically what we can observe as societies move above the 40 median age mark are a number of stylised facts. Weakness in domestic private consumption would be one of these, absence of consumer credit driven property booms would be another, growing pressure on the national debt as the elderly dependence ratio steadily rises would be another, and growing dependence on export growth for sustaining GDP growth would be the central feature of the whole edifice. We hope you will find the background data presented here useful in assessing the argument which we are presenting on this blog, which is basically that a key component in the longer term growth stagnation from which Germany is suffering has its roots in the underlying demographics. Basically and in the long run (possibly with a 30 year lag) fertility does matter. Please click on thumbnails for better viewing.

What now follows which will be a very rough and ready attempt to describe in broad brush strokes how the contemporary German economy actually works. First off, and as is well known, German society is ageing, and at the same time the German population has started declining. Not only is Germany's median age rising, the proportion of the population in the key 25-49 age group is now falling.

As can be seen from the chart this crucial age group touched its highpoint in 1997/98. This could be thought of as the moment of maximum capacity for the German economy since it includes the crucial 25 to 40 household-former, first-time-homebuyer group. In terms of credit expansion, it is this group which drives a significant part of internal demand.

The age group also includes another important group, the 35 to 50 years one. This group drives an economy in productive terms, since these are the prime age workers. If you think of a society as a 100 metres sprint athlete, then there is an age when this athlete is at the maximum of his or her running potential, an age after which each time they can only run the 100 metres more slowly.

Well a society is the same in terms of its collective economic potential, without addressing underlying issues either through fertility or immigration, it can only move forward more and more slowly. Consumption becomes flat, and GDP growth - gioven the external dependence - fragile.

Private consumption has hovered pretty close to the 60% mark for many years now, while government consumption - after moving sharply upwards as a total share in the first half of the 1970s has subsequently remained pretty constant, moving around the 19% of GDP mark. The big difference has been in the importance of fixed capital formation (GFCF) which reached from 1975 to 2000hovered around the 22 - 24% of GDP mark.

Prior to 1975 GFCF was at a much higher level, while post 2000 it has dropped substantially And So what we can see is that the year between, say, 1975 and 2000, when GFCF remaind a more or less constant share of GDP, constituted - to use the language of neo-classical economics - the constant growth period of the German domestic economy.The years prior to 1975 were the convergence, or "catch-up" years

And especially the 1960s, after Germany finally broke out of the destruction and devastation of WWII - while the years after 2000 constitute what the neo-classicists would call the "balanced growth period", although as we can see, it isn't very balanced, and there certainly isn't a steady state.

2008 Forecasts: There is a consenus at the present time that the German economy is slowing. Where there is no real consensus is over the rate at which it is slowing and where and when it will settle. It is clear that GDP growth in 2007 will be below the heady 3.1% annual rate achieved in 2006. The OECD last December revised their 2007 German forecast down to 2.6%, and their 2008 one down to 1.8%. The IMF in their October World Economic Outlook forecast growth for 2007 at 2.4%, slowing to 2% in 2008. Morgan Stanley's Elga Bartsch, while optimistic that the German economy will whether the credit crunch better than most (and here she may well be right) is somewhat more sanguine, putting 2008 growth at 1.5%. In general though I rather doubt her overview that "Germany could well be on the way to becoming the new growth locomotive in Europe." and especially her suggestion that "the phase of underperformance in terms of GDP growth, which has plagued Europe’s largest economy for years, is clearly over." Unfortunately, what we are arguing on this blog is that Germany's GDP growth rates since the mid 1990s are not some special kind of "underperformance", but what can be expected from a society with a rapidly rising median age which is increasingly dependent on exports rather than domestic consumption for growth.

The EU commission in it's November 2007 forecast was also convinced that the German economy was now on a "solid growth path", forecasting 2.5% growth for 2007 and 2.1% for 2008. I personally will be very surprised if we see growth in the region of 2% for the German economy in 2008, and I even consider the 1.8% from the OECD and 1.5% from Morgan Stanley still on the high side given the extent of downside risk. Basically the reasonably favourable depreciation rules which currently apply to German investment have been changed as of 1 January 2008, and we might reasonably expect to see some sort of impact on investment comparable with the negative shock which hit private domestic consumption following the VAT rise on 1 Jan 2007. In addition all the indications suggest that German consumption will continue to be weak in 2008. So if consumer consumption is at best flat, governemnt consumption equally so, and investment and construction weakening, we are simply lefy with export growth, and here the outlook is definitely more negative in 2008 than it was in 2007. The Spanish economy (one important German customer) is visibly wilting by the day, as is the UK (another big customer), but it is to Eastern Europe we must look for the biggest impact on German exports of any correction in 2008. Just one data point should suffice, Germany exports roughly the same value of goods to the Czech Republic (and more to Poland) as it does to China. This means that Geramny is proportionately not that exposed to any slowdown in China, but hugely exposed to any sudden shift in growth and demand in the East of Europe.

So I would say, that on current data, 1% growth in Germany in 2008 look a reasonable estimate at this point, but that this needs to be taken to mean with considerable downside risk. Germany is now tremendously dependent on what happens elsewhere, and until what does actually happen elsewhere becomes clearer it is difficult to be more precise on Germany. The only apparent bright spot on the horizon is employment, but I am dubious that in the context of Germany's ageing workforce this will work through as some are hoping, as I expain at some considerable length in this post here. My opinion is that Germany will enter recession at some point during 2008, and that we may well have 2 consecutive quarters of negative growth. The continuing high euro will maintain pressure on German exports, and high oil and food prices will maintain pressure on the inflation front, at least in the first half of 2008. The ECB will probably switch stance towards rate reductions at some point, but since, as Elga Bartsch among many others so eloquently argues German internal consumption and investment are not especially dependent on credit conditions, easing from the ECB may not have as much impact as one would hope for.