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MACRO ECONOMIC THEORY AND POLICY

CIA-1
ECONOMIC ANALYSIS OF GERMANY

SUBMITTED BY
ASTHA SINGH
2282028
MAECO(CBCS)

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TABLE OF CONTENTS

NAME OF THE
S. NO. TITLE PAGE NO.
1 INTRODUCTION 3-4
KEY
2 FUNDAMENTALS 5
3 INCOME 6
GLOBAL
4 OUTLOOK 7
5 CONSUMPTION 8-9
6 FDI RATES 9-12
7 QUESTIONNAIRE 13-17

8 CONCLUSION 18-21
9 REFERENCES 22

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INTRODUCTION
The economy of Germany is a highly developed social market economy. It has the largest
national economy in Europe, the fourth-largest by nominal GDP in the world, and fifth by GDP
(PPP). In 2017, the country accounted for 28% of the euro area economy according to the
International Monetary Fund (IMF). Germany is a founding member of the European Union and
the Eurozone.

In 2016, Germany recorded the highest trade surplus in the world, worth $310 billion. This
economic result made it the biggest capital exporter globally. Germany is one of the largest
exporters globally with $1810.93 billion worth of goods and services exported in 2019.The
service sector contributes around 70% of the total GDP, industry 29.1%, and agriculture 0.9%.
Exports accounted for 41% of national output. The top 10 exports of Germany are vehicles,
machinery, chemical goods, electronic products, electrical equipment, pharmaceuticals, transport
equipment, basic metals, food products, and rubber and plastics. The economy of Germany is the
largest manufacturing economy in Europe, and it is less likely to be affected by a financial
downturn. Germany conducts applied research with practical industrial value and sees itself as a
bridge between the latest university insights and industry-specific product and process
improvements. It generates a great deal of knowledge in its own laboratories.

Germany is rich in timber, lignite, potash and salt. Some minor sources of natural gas are being
exploited in the state of Lower Saxony. Until the German reunification, the German Democratic
Republic mined for uranium in the Ore Mountains (see also: SAG/SDAG Wismut). Energy in
Germany is sourced predominantly by fossil fuels (30%), with wind power in second place, then
nuclear power, gas, solar, biomass (wood and biofuels) and hydro. Germany is the first major
industrialized nation to commit to the renewable energy transition called Energiewende.
Germany is the leading producer of wind turbines in the world.[36] Renewables produced 46%
of electricity consumed in Germany (as of 2019).99 percent of all German companies belong to
the German "Mittel stand", small and medium-sized enterprises, which are mostly family-owned.
Of the world's 2000 largest publicly listed companies measured by revenue, the Fortune Global
2000, 53 are headquartered in Germany, with the Top 10 being Allianz, Daimler, Volkswagen,
Siemens, BMW, Deutsche Telekom, Bayer, BASF, Munich Re and SAP.

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Germany is the world's top location for trade fairs. Around two thirds of the world's leading trade fairs
take place in Germany. The largest annual international trade fairs and congresses are held in several
German cities such as Hanover, Frankfurt, Cologne, Leipzig and Düsseldorf.

Macroeconomic Outlook

According to the Federal Transport Infrastructure Plan 2030, the German government will be investing
$147.6 billion during 2016–2030 into the country’s roads.

In September 2021, Sinara Transport Machines Center of Innovation Development (STM CID)

and Deutsche Bahn signed a memorandum of understanding (MoU). The MoU lays the foundation for
two parties to develop and undertake joint testing of railway equipment, collaborate with rolling stock
manufacturers and prepare joint applications for international projects.

According to Global Data, the nominal GDP increased from $3.8 trillion in 2020 to $4.2 trillion in
2021 and is further forecast to increase to $4.5 trillion in 2022. The country stood at fourth rank among
219 economies.

The unemployment rate has been exhibiting a downward trend since March ‘21. It declined to 3.1% in
January 2022 from 3.7% in March 2021. Reopening initiates have restored number of jobs lost due to
COVID-19 restrictions. With gradual easing of restrictions and reopening of the economy, Germany
has been exhibiting signs of recovery.

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Key Fundamentals

STRENGTHS

• Strong industrial base (24% of GDP, 2021)

• Low structural unemployment; well-developed apprenticeship system
• Importance of family-owned exporting SMEs (Mittel stand)
• Resilient private household debt (99% of net disposable income, 57.6% of GDI
• Consensus orientated politics, institutional system promoting representativeness
WEAKNESSES

• Declining working population from 2020 onwards, despite immigration

• Low bank profitability
• Strong dependence on international energy imports (e.g. 39% of all German gas
imports come from Russia)
• Prominence of the automotive and mechanical industries, particularly in exports
(30% of total exports in 2020)
• Capacity constraints, insufficient investment (especially in internet accessibility)
and venture capital limit productivity gains

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INCOME

The GDP by income (USD): Gross national income of Germany (2018 - 2026,
Millions)

Gross National Income

Gross National Income (GNI) is GDP less net taxes on production and imports, less
compensation of employees and property income payable to the rest of the world plus the
corresponding items receivable from the rest of the world (in other words, GDP less primary
incomes payable to non-resident units plus primary incomes receivable from non-resident units).
An alternative approach to measuring GNI at market prices is as the aggregate value of the
balances of gross primary incomes for all sectors.

Gross National Income of Germany

The gross national income of Germany attained a value of $4.4 trillion in 2021. The indicator
recorded a year-on-year increase of 12.9% in 2021. Between 2018-2021, the indicator recorded
an increase of 8.4%. The gross national income of the country was highest in 2021 and lowest in
2018, between 2018 and 2021.

Global Outlook

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The top five countries with the highest gross national income globally in 2021 include the United
States, China, Japan, Germany, and the United Kingdom. North Macedonia, Malta, Albania,
Botswana, and Bosnia and Herzegovina were among the countries with the lowest gross national
income worldwide in 2021.

Factors Affecting the Global Economy

Impact of COVID-19:

More instances have been recorded globally as a result of Omicron, a novel COVID-19 strain,
disrupting supply chain management. However, the worldwide vaccination drive has decreased
COVID-19 fatalities.

Russia-Ukraine war:

Global economic expansion is hampered by the conflict between Russia and Ukraine. Due to the
war, trade and investment have suffered because Russia has been subjected to economic
sanctions, and several significant corporations have ceased operations there.

Rising Inflation and Interest Rates:

Due to rising inflation rates in both developing and advanced economies, central banks have
been forced to tighten monetary policy and raise interest rates to keep prices from rising.
However, a steady increase in interest rates could lead to financial distress in some economies.

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CONSUMPTION

Consumer Spending in Germany averaged 372.53 EUR Billion from 1991 until 2022, reaching
an all-time high of 432.19 EUR Billion in the fourth quarter of 2019 and a record low of 311.65
EUR Billion in the third quarter of 1991. This page provides the latest reported value for -
Germany Consumer Spending - plus previous releases, historical high and low, short-term
forecast and long-term prediction, economic calendar, survey consensus and news. Germany
Consumer Spending - values, historical data and charts - was last updated on March of 2023.

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Related Last Previous Unit Reference

Retail Sales MoM -5.30 1.90 percent Dec 2022

Retail Sales YoY -6.40 -5.90 percent Dec 2022

Consumer Spending 422.83 427.12 EUR Billion Dec 2022

Disposable Personal Income 574.67 563.75 EUR Billion Dec 2022

FDI in Figures

Germany is considered an attractive country for foreign direct investment, but in recent years the
influx of FDI has been hampered by the global recession and subsequent Eurozone crisis.
According to the 2022 World Investment Report by UNCTAD, FDI inflows into Germany more
than halved in 2021, totaling USD 31.26 billion against USD 64.59 billion one year earlier. The
stock of FDI increased slightly in 2021 to over USD 1.1 trillion. The country has traditionally
been a key investor: after declining sharply in 2020, Germany's outward investment reached
USD 151.6 billion in 2021, marking a 150.2% increase year-on-year. According to data from the
national Trade and Investment Agency (GTAI), Germany’s federal states registered 1,806 FDI
projects (excluding M&A) in 2021 - a 7% rise compared to the previous year. In the same year,
the number of projects (1,851) rebounded almost fully compared to pre-COVID levels, with
1,806 international companies setting up shop in Germany in the form of greenfield investments.
FDIs in Germany are mostly owned by Luxembourg, the Netherlands, the U.S., Switzerland and
the UK, which represent more than 60% of the total stock. France, Ireland, Italy, Austria, and
Japan are also investing in the country. FDIs are mainly oriented towards finance and insurance,
manufacturing and trade, information and communication, management and consultancy
activities, and real estate. The latest data from OECD shows that in the fist half of 2022 FDI
inflows to Germany reached a total of USD 17.7 billion, more than eight times higher compared
to the second half of the previous year. In 2022, Intel and Northolt announced massive
expansion projects, which were worth at least EUR 17 billion and EUR 4 billion respectively.

Among the country’s strengths are a highly powerful and diversified industrial network, a highly
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skilled workforce with a good command of English, reliable infrastructure, a favorable social
climate, a table legal framework and a location at the heart of Europe. Its main weaknesses are a
high tax rate (for both individuals and businesses), rather inflexible labor laws, and the high
dependence on the automotive and mechanical industries. The Economist Business Environment
ranking puts Germany in the 13th place out of 82 countries in terms of business environment.
However, The Economist notes that the country is more exposed than most other large high-
income economies to the near-term fallout and energy risks from the Russia-Ukraine conflict.
Constraints on the ranking include a high tax burden on labor income and on firms, combined
with high administrative costs.

Foreign Direct Investment 2019 2020 2021

FDI Inward Flow (million USD) 52,665 64,589 31,267

FDI Stock (million USD) 963,567 1,107,839 1,139,106

Number of Greenfield Investments* 860 1,077 1,118

Value of Greenfield Investments (million USD) 21,324 25,917 40,527

What to consider if you invest in Germany

Strong Points

Germany's strengths for FDI are:

• Strategic location in the center of Europe

• Political stability and a good anchor in international relations
• The largest population of the European Union
• Infrastructure among the most developed in the European Union
• Strong manufacturing base (almost a third of the GDP)
• Strong exports (high range products and diversified clients)
• Advanced technology and expertise
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• Highly qualified work force

• Consolidated public finances
• Competitive taxation.

Weak Points

Germany's weaknesses for FDI are:

• Eastern part of the Germany (former DDR) is struggling to catch up with the
western part in many areas
• Ageing population weighs heavily on growth
• German economy is highly dependent on exports, especially to China
• Ageing infrastructure
• Unproductive service sector
• Insufficient infrastructure for development of start-ups
• A low investment/GDP ratio
• Lack of engineers

Government Measures to Motivate or Restrict FDI

Germany distinguishes itself with a business climate compliant with international
standards and with transparency of its judicial system. The German Government is
implementing measures aimed at encouraging investments including:
• Grants for investments (Cash Incentives Program: GRW)
• Grants for R&D for different research categories (fundamental research, industrial
research, experimental development)
• Grants for hiring personnel (programs focusing on recruitment support, training
support, wage subsidies and on-the-job training)
• Public loans
• Public guarantees.

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QUESTIONNAIRE ON THE BASIS OF RESEARCH ANALYSIS OF GERMANY

ECONOMY.
1) WHAT LEADS TO SURGING INFLATION AND THWARTS THE
GERMANY ECONOMIC RECOVERY IN UKRAINE WAR?

The war in Ukraine, and the resulting EU sanctions against Russia and Belarus, substantially
changed the outlook for the German economy in 2022. Although direct trade with Russia,
Ukraine and Belarus is very limited (e.g. Russia is the 15th biggest trade partner of Germany,
with a share of 2.3% of total goods trade in 2021), the consequences are strong due to
disruptions in the supply chain (such as in the chemicals and automotive sectors, which
together account for around 6.5% of GDP) and in energy imports. As a full stoppage of energy
imports from Russia and Belarus is not expected, the main impact is caused by surging energy
prices, with oil prices shooting up by 52% and natural gas prices by 55tween the beginning of
2022 and early April. Besides higher energy prices, further disruptions in the supply chain and
higher food prices led to a record high increase of producer prices (the highest since 1949),
which translated into a consumer price inflation rate of 7.3% in March 2022. This is the highest
level since autumn 1981, in the aftermath of the second oil-price shock. While inflationary
pressures should decrease slowly in the second half of the year, it should remain high, far
above the 2% target of the ECB. Higher wage agreements with the unions should further push
inflation, as well as the increase of the minimum wage from 9.82 euro per hour to 10.45 euro
in July 2022 and to 12 Euro in October 2022. In total, nominal wages should increase by 2.5%
this year and additional 4.4% in 2023, which could support higher inflation. The ECB is slowly
reacting to this strong inflation dynamic. The central bank stopped the Pandemic Emergency
Purchase Programme in March and could end all QE-purchases in Q3 2022. A first increase of
the deposit rate is expected towards the end of the year, however, the central bankers will be
probably cautious with rate hikes, as they want to calm down financial markets and keep yields
of European bonds low. Due to the high inflation dynamics, the purchasing power of
households will decrease noticeably, although, at least at the beginning of the year, the high
savings that bulked up during the last two years of pandemic will buffer some of it.
Nevertheless, consumption should decline in the first half of the year. Private investments
should decrease too, due to the supply chain disruptions and sanctions, but also because of
the high uncertainty regarding the development of the war. The public sector will support
growth via higher military investments, energy subsidies to decrease the effect of surging
energy costs (e.g. a subsidy for households to buy fuels for three months and a 300 Euro one-
off payment for every household), and further support for companies still dealing with COVID-
related measures. This comes in addition to the announced public structural investments of
EUR 51.8 billion (1.4% of GDP) in 2022. While we expect only very limited growth over the rest
of the year, it will be highly dependent on the further development of the COVID-19 pandemic
and possible new mutations.
 2) GERMANY’S ECONOMIC GOLDEN AGE COULD BE COMING TO AN
END. HOW?
According to an article in Economic Times magazine, the world is used to a thriving German economy.
Relatively few jobs were lost as unemployment soared elsewhere during the financial crisis a decade ago.
Since then, it has been an anchor of fiscal stability while much of the eurozone struggles with debt and
deficits. Public debt is below the 60% GDP target set by the EU treaty and is declining. Thanks to labor market
reforms in the 2000s, inequality is barely higher than in France, but Germany's employment rate is higher
than in the more employment-friendly UK. A geographically dispersed manufacturing industry with around
200,000 small and medium-sized enterprises has mellowed the regional differences that fueled populism in
the West. But the German economy suddenly looks fragile. In the short term, it is expected to slow down. It
narrowly avoided a recession at the end of 2018. Temporary factors, such as tightening regulations on
automobile emissions, are also partly responsible, but the recovery trend is minimal. Manufacturing output
likely fell in January. Business is losing credibility. Both the IMF and Treasury have downgraded their 2019
growth forecasts (see article). In the long run, changing trade and technology patterns work against
Germany's global producers. In response, on February 5, Minister of Economy Peter Altmaier laid out a plan to
block unwanted foreign acquisitions and develop national and European champions. Germany is wrong both
in the short term and in the long term. Start with the business cycle. Pointing to higher wages and higher
inflation prospects, many politicians believe the economy is close to overheating. In their opinion, slow
growth was expected and even necessary. That is complacent. Even before the slowdown, the imf predicted
that in 2023 core inflation will be only 2.5%—hardly a sign of runaway prices. In any case, higher German
inflation would be welcome, as a way to resolve imbalances in competitiveness within the euro zone that
would elsewhere adjust through exchange rates. The risk is not of overheating but of Europe slipping into a
low-growth trap as countries that need to gain competitiveness face an inflation ceiling set too low by
Germany.
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The slowdown also portends deeper problems for Germany’s globalized economic model.
Weakness in part reflects the fallout from the trade war between China and America, two of
Germany’s biggest trading partners. Both are increasingly keen on bringing supply chains home.
America is due soon to decide whether to raise tariffs on European cars. Trade is already
becoming more regionalized as uncertainty grows. If global commerce splits into separate
trading and regulatory blocs, Germany will find it harder to sell its goods to customers around
the world.

Reform has made Germany’s labor market strong, but it will soon face new challenges. Industrial
jobs look particularly vulnerable to automation, yet lifelong learning and retraining are relatively
rare in Germany. The workforce is ageing. Neither the government nor business is much
digitized and neither invests enough. If technological change demands that its economy
embraces digital services, Germany will struggle.

The government is not blind to these problems, but Mr. Altmaier’s protectionism is the wrong
medicine. The left, meanwhile, wants to roll back labor-market reforms. Better to expand a
recent boost to infrastructure spending and press ahead, at scale, with tax incentives for private
investment. Both should help growth today and boost the economy’s long-term prospects.
Significantly lower taxes on households would encourage a rebalancing away from exports and
towards consumption. A dose of competition could invigorate coddled service industries. The
German economy has had an impressive run, but cracks are appearing. It is time to worry.

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CONCLUSION

Germany is the fourth largest economy in the world after the United States, China and Japan and
the largest economy in Europe. It is the third largest export nation globally: With 70% the
service sector contributes the largest part to the country’s GDP.

Germany could avoid recession

The global economy will weather the consequences of the war in Ukraine and continued high
inflation better than initially feared. In Germany, gross domestic product (GDP) is expected to
grow by only 0.1% in 2023 - however, this is an increase of 0.4 percentage points on the
estimate. Next year, the German economy is then expected to grow by 1.4% - 0.1 percentage
points less than previously expected. Contrary to earlier forecasts, Germany could avoid a
recession after all.

However, numerous risks such as a further worsening of the Corona situation in China, an
escalation of the Russian war of aggression in Ukraine and a debt crisis due to the central banks'
tight monetary policy would result in a deterioration of the global economy.

For further insights into global growth prospects, challenges and threats, see our Global
Economic Outlook. The views of more than 1,300 CEOs on future global economic
developments and other exciting topics such as technology, human resources and ESG are
presented in our CEO Outlook.

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Biggest slump in German exports since the start of the pandemic

German exports fell significantly in December 2022. The decline compared with November was
6.3% after adjustment for calendar and seasonal effects. It is the sharpest decline since the slump
at the start of the Corona pandemic.

For 2022 as a whole, Europe's largest economy's exports rose 14.3% year-on-year to €1.56
trillion. Imports rose by 24.3% to a value of 1.49 trillion euros.

The increases were "largely based on price effects", the German Chamber of Industry and
Commerce (DIHK) commented on the figures. As with inflation, the development was mainly
due to rising energy prices, it said.

Last year's export balance sheet turned out to be "worse than it seems", said Tanja Gönner, Chief
Executive of the Federation of German Industries (BDI).

Germany's once high export surplus has more than halved compared to the previous year and
stood at less than 80 billion euros in 2022. According to Destatis, this is the lowest figure since
2000 and the fifth decline in a row.

Inflation remains at a high level

Inflation in Germany remained high at the beginning of the year. Consumer prices rose by an
average of 8.7% year-on-year in January.

The increase is probably primarily due to the fact that full budget payments were again payable
by gas and district heating consumers in January. In addition, there were no further reductions,
but slight price increases for fuels. Only heating oil had provided slight relief in the energy
sector.

The inflation rate could also be high again in February. A sustained and significant decline in
inflation was expected from March onwards, when gas and electricity price brakes would take
effect.

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Labor market remains stable

The number of unemployed in Germany rose to 2.62 million in January. That is 162,000 more
people without a job than in December and 154,000 more than in January 2022. The
unemployment rate thus climbed by 0.3 percentage points to 5.7% compared with the previous
month. The increase was "usual for the season". At the beginning of the year, demand for labor
had weakened slightly, but overall staffing requirements were stable at a comparatively high
level.

Immigration leads to record population

Never before have so many people lived in Germany at the end of a year. Strong immigration
boosted the population to more than 84 million at the end of 2022. Compared with the end of
2021, the population increased by 1.1 million. The reason for the strong growth was record net
immigration, including war refugees from Ukraine, he said. In addition to the strong immigration
of Ukraine refugees, the immigration of people of other nationalities had also increased
significantly.

According to the current estimate, 1.42 to 1.45 million more people came to Germany than
moved abroad. This means that net immigration in 2022 was more than four times as high as in
the previous year (329,163) and higher than at any time since the start of the time series in 1950.

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REFERENCES

• Wikipedia contributors. (2023, February 26). Economy of Germany. Wikipedia.

https://en.wikipedia.org/wiki/Economy_of_Germany
• Shield Square Captcha. (n.d.-b). GLOBAL DATA.
• TRADING ECONOMICS. (n.d.). Germany Consumer Spending - 2022 Data - 2023
Forecast - 1991-2021 Historical - Chart.
https://tradingeconomics.com/germany/consumer-spending
• Germany. (n.d.). https://www.cofacecentraleurope.com/Economic-analysis/Germany
• Foreign investment in Germany - Santandertrade.com. (n.d.).
https://santandertrade.com/en/portal/establish-overseas/germany/foreign-investment
• The Economist. (2019, June 4). It is time to worry about Germany’s economy.
https://www.economist.com/leaders/2019/02/07/it-is-time-to-worry-about-germanys-
economy
• Glunz, A., & Von Prittwitz, J. (2020, July 1). Economic Key Facts Germany. KPMG.
https://kpmg.com/de/en/home/insights/overview/economic-key-facts-germany.html

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