Economic Weekly

I Just Can't Stop Growing, Too

  • Why it matters

    Why it matters

    This weekly column by Mr. Rürup offers a rundown of the most important economic news out of Germany.

  • Facts

    Facts

    • German exports hit an all-time high of €118.2 billion in March, while imports reached €92.9 billion — the highest monthly figures ever reported for both exports and imports.
    • The number of job vacancies rose to 1.064 million in the first quarter of 2017, also a record high.
    • Berlin is facing repeated calls from the IMF to invest more to reduce income inequality, with its next such demand expected in a May 15 report.
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    Audio

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Mobil arbeiten in der Bahn
Job wunder. Source: Picture Alliance [M]

The economic climate is better than the weather at the moment, as a boom takes shape in foreign trade and the seven-year-long growth in employment continues. The fact that production in the commercial sector declined slightly in March, as reported by the Federal Statistical Office on Tuesday, had been expected and is likely to be an outlier.

On the same day, the statisticians from Wiesbaden reported that exports reached €118.2 billion ($129.1 billion) in March and imports rose to €92.9 billion. Both are record-high levels. Based on the current situation, the German current account balance for this year could end with a new record surplus, and foreign criticism of the export-heavy German economy could become even louder. However, as import dynamics are more pronounced than export growth, as was the case last year — exports increased by 13.9 percent from March 2016 to March of this year, while imports rose by 17.1 percent — it can be assumed that (total) foreign trade will have a negative impact for the second consecutive year on the development of overall economic performance for the current year. Private consumption is likely to be the most important driver of growth in the third year.

New records are also in the making on the labor market. The average annual number of employees will rise to more than 44 million this year and to 44.6 million next year. Particularly encouraging is the fact that the additional employees are primarily employees subject to social insurance – as reported by the Cologne Institute for Economic Research.

Martin Schulz, the Social Democratic Party’s candidate for the chancellorship, received unexpected campaign support from abroad.

The average wage increases in recent years were consistently higher than the sum of inflation and productivity growth. They were thus larger than the so-called macroeconomic scope for distribution, and unit labor costs increased markedly. However, the increase in employment continues unabated and the number of vacancies reported to employment offices in the first quarter of this year is at an historic high of 1.064 million, according to the IAB Institute for Employment Research. This is why there is every reason to believe that the balanced wage level, in which the labor supply and demand for labor are equal and there is virtually no hidden reserve anymore, has not been reached yet. In light of the economic upturn, which has now lasted for more than seven years and is accompanied by strong employment growth, this is a remarkable conclusion.

There is also good news coming from France, at least from a European perspective, because Emmanuel Macron is a dedicated supporter of the idea of a Europe that is more united. His victory in the presidential election last Sunday has allayed fears that the second-largest economy in the euro zone could withdraw from the monetary union. At the same time, the discussion about a change of course at the European Central Bank has begun. It was certainly no coincidence that Yves Mersch, a member of the ECB’s Executive Board, said in a speech on Monday in Tokyo that in view of the economic recovery in the euro area, if the inflation rate continues to approach the ECB’s inflation target of just under 2 percent, it may be time for a normalization of monetary policy. The first step towards such a normalization would likely be for the ECB to scale back its bond-buying program, which is currently at €60 billion a month. We will see.

Martin Schulz, the Social Democratic Party’s candidate for the chancellorship, received unexpected campaign support from abroad. In its report on Germany, which will be published on May 15, the International Monetary Fund is expected to ask the German government to do more to “strengthen inclusive growth.” Specifically, this means a more intensive fight against inequality, increased investment efforts, strong wage increases, higher capital levies for the affluent and relief for people with lower incomes. The Hartz welfare reforms should not be reversed, however. Instead, the labor market needs to be further liberalized. This is what Handelsblatt writes in its Wednesday edition, citing “several people who are familiar with the ongoing talks between the IMF and the federal government.”

The government could expect €54.1 billion in additional tax revenues by 2021.

According to the estimates published by the finance ministry on Wednesday, in response to a request from the Left Party, 2.69 million or 6.4 percent of the households liable for income tax currently pay the top tax rate of 42 percent. Of these, 1.65 million were single persons, who are subject to this top tax rate if they earn more than €53,666 a year. When jointly assessed married couples are taken into account, this amounts to 3.73 million people. And according to the finance ministry, 101,000 people or 0.2 percent of people liable for income tax are in the income class subject to the 45 percent tax rate applicable to the wealthy. By comparison, in 2012 only 1.76 million households had taxable income in this top tax bracket.

On Thursday, the Working Group for Tax Estimates reported that the government, that is, the federal, state and municipal governments, could expect €54.1 billion in additional tax revenues by 2021. Against this background, even a political professional like Finance Minister Wolfgang Schäuble, or a successor, would find it difficult to fend off all the spending requests of fellow cabinet members, as well as the demands for significant income tax relief.

In Germany, digitalization is viewed as the “fourth industrial revolution” and is dubbed “Industrie 4.0.” The result is that the discussion is strongly focused on the related changes in production and the development of new products. In concrete terms, however, this also relates to platforming. Platforms are virtual marketplaces, and the underlying business idea is to use platforms to insert yourself between consumers and producers of goods and services. An example of this is Alibaba, the most expensive retail company in the world – based on its market valuation – which has no goods at all. If producers offer their goods and services via a platform, they lose direct customer access and move back by one position in the supply chain. They have become intermediary producers of the goods offered on the platform. The associated additional sales opportunities are offset by the risk of dependency on the platform operator, which increases as the customer potential of a platform increases. I have the impression that German industry, which is at the forefront of modern production technologies, has not yet paid sufficient attention to the risks of progressive platforming.

 

To contact the author: ruerup@handelsblatt.com                        

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