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Can the German economy continue to defy gravity?

The Germany-US trade corridor is firmly entrenched, with HSBC analysts expecting demand for German capital and goods to remain high in its primary North American market.

Contrary to expectations, Germany is a commerce and industry bright spot in Europe. Labelled the Sick Man of Europe at the turn of the century, Germany defied its critics to emerge from the global recession and a series of euro crises as an economic superstar.

The nation reversed its shrinking growth rate and high unemployment numbers partly on the back of labour market reforms in the 2000s to increase competitiveness. In keeping a lid on wages and allowing more flexible working practices Germany set up its export sector for success.

Today Germany is Europe’s largest and strongest economy and the world’s fourth-largest in terms of nominal GDP, with brands such as Siemens, Deutsche Telekom, Allianz and Volkswagen flying the German flag across the world. Industrial machinery and transport equipment have served Germany well in recent years, and we expect this to continue.

Top trading partners

Advanced economies like the US in particular continue to provide a source of demand growth for German firms. Data compiled for the HSBC Global Connections Trade Forecast indicate that the US will continue to remain a top-five export destination for German firms for the next 15 years. US products will remain important, too, with the country rising from fifth to fourth position on Germany’s import origins list by 2030.

Recovery in advanced economies is a key driver of German export success, coming at exactly the right time as growth in China slows. Germany benefited substantially from the investment boom in China, providing machinery to facilitate housing construction and factory expansion in the Middle Kingdom.

We expect trade with China to pick up as average annual growth averages 8% between 2021 and 2030 to overtake France as Germany’s top export destination by the end of the next decade. However, on-going integration between Germany’s manufacturing sector and supply chains in Europe is expected to keep the US among the country’s key trading partners.

Exchange rate movements are likely to be supportive of German competitiveness in US markets, with Germany’s capital goods and machine tools in ever-greater demand internationally as other economies increase their investment expenditure.

Lower energy costs than might have been anticipated also play into German’s success on the world stage. The country is well-placed to benefit from global demand for the energy intensive goods in which it specialises, such as industrial machinery and transport equipment.

Import corridors to watch

Can the good times continue for Germany-US trade relations? Germany is on a US monitoring list to pressure foreign governments to tackle large trade imbalances.

The US Treasury is of the view that Germany’s surplus could be used to rebalance the euro area and level the trade playing field with the US, reports the AP and AFP news organisations. However, UK columnist Martin Wolf cautions, in the influential London-based FT, that Germany is unable to absorb its savings back home, despite ultra-low interest rates.

Over the long term, we expect Germany’s import and export bases to become more diversified geographically. South and South East Asian countries are likely to take an increasing share of the German market, according to the HBSC Trade Forecast. Among high-income economies, exports to Canada are expected to grow fastest, by an average of 5% a year from 2021-2030, our projections suggest.

That’s not to say there aren’t risks on the horizon. The German government has work to do to tackle challenges, not least of all the shrinking working age population – a trend that could impact negatively on trade growth.

Barring a step-change in productivity, annual GDP growth is expected to slow from approximately 1.5% per year to just over 1%. This has implications for Germany’s export capacity as well as household spending and demand for imports.

That said, Germany’s manufacturers have demonstrated their ability to innovate as market conditions change. Industrial machinery, transport equipment, chemicals and pharmaceuticals are likely to dominate exports up to 2030, with the focus on the highest value-added processes in Germany itself – and low-cost labour accessed elsewhere in Europe.

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