Macroeconomics

09 September 2014

Ready for new challenges 

A slight decline in Germany’s performance in the second quarter should not overshadow the fundamental soundness of Europe’s largest economy.

Although the country’s real output shrank by a sliver (0.2%), while manufacturing shrank by 1%, analysts caution against jumping to alarmist conclusions. They note that the political fallout from the conflict in Ukraine has hurt trade between Germany and Russia and hampered investment in their joint projects.

However, the level of concern may be overdone as trade with Russia accounts for just 3% of the German economy.

Germany has longstanding economic strengths, such as its creditable record for keeping its budget balanced. Moreover, shortages of employees in some sectors of the economy, which could be alleviated by allowing wages to rise, is hardly a sign of a nation in trouble.

The country was ranked fourth in the World Economic Forum’s 2013-14 Global Competitiveness Index, ahead of the US, the UK, Japan and China. The report highlighted the country’s strong schools, well-educated workforce and high quantity of innovative companies.

Along with the rest of Europe, Germany does face certain significant long-term fiscal and economic challenges.

Aging populations must deal with growing competition from emerging markets around the world, and governments are struggling to find the right balance between maintaining fiscal rectitude and strong social safety nets.

Germany’s effective governance, high productivity and fiscal discipline, however, give the country the firm foundation needed to tackle these challenges and serve as a model for its European partners.