Economy of Germany

Germany is one of the world's most highly developed market economies. It is the world's third largest economy in USD exchange-rate terms, the fifth largest by purchasing power parity (PPP) and the largest economy in Europe.

Recent performance has not been dynamic, however, and the German economy is marked by vulnerability to external shocks, domestic structural problems, and continued difficulties in fueling formerly communist East Germany.

Germans describe their economic system as "social market economy". An extensive array of social services is provided. Although the state intervenes in the economy through the provision of subsidies to selected sectors and the ownership of some segments of the economy, competition and free enterprise are promoted as a matter of government policy.

History

From the 1948 currency reform until the early 1970s, West Germany experienced almost continuous economic expansion (see also: Wirtschaftswunder), but real GDP growth slowed and even declined from the mid-1970s through the recession of the early 1980s. The economy then experienced eight consecutive years of growth that ended with a downturn beginning in late 1992. Since reunification in 1990, Germany has seen annual average real growth of only about 1.5% and stubbornly high unemployment. The best performance since reunification was registered in 2000, when real growth reached 3.0%. In 2003, Germany experienced a negative GDP growth of about -0.1%. Estimated growth rate in 2006: +2.0%.

Year	GDP growth rate
2002	+0.2%
2003	-0.1%
2004	+1.6%
2005	+0.9%

General view

The German economy is heavily export-oriented, with exports accounting for more than one-third of national output (since spring 2003, Germany exports in absolute figures more goods than every other country). As a result, exports traditionally have been a key element in German macroeconomic expansion. Germany is a strong advocate of closer European economic integration, and its economic and commercial policies are increasingly determined by agreements among European Union (EU) members. Germany uses the common European currency, the Euro, and its monetary policy is set by the European Central Bank in Frankfurt, Germany.

Despite this external vulnerability, most foreign and German experts consider domestic structural problems to be mainly responsible for recent sluggish performance. They note that

an inflexible labour market is a main cause of persistently high unemployment
the same is true for high non-wage labour costs
heavy bureaucratic regulations burden many businesses and the process of starting new businesses

Nevertheless, the export oriented economy is doing well (exports grew 50% during the last 5 years), the main problem is a weak home market, in part due to a low consumer confidence. Therefore, some experts believe that Germany's current trouble doesn't result from domestic structural problems, but from stagnating wages over more than a decade. Germany finances its reunification to a large extent by social insurance contributions, forcing up non-wage labour costs. To conserve the competitiveness of German workers, the unions abandoned high wage claims since the mid-1990s.

More than ten years after the unification of the two German states, great progress has been made in raising the standard of living in eastern Germany, introducing a market economy and improving infrastructure there. At the same time, the process of convergence between East and West is taking longer than originally expected and, on some measures, has stagnated since the mid-1990s. Eastern economic growth rates have been slower than in the West in recent years, unemployment is twice as high, prompting many skilled easterners to seek work in the West, and productivity continues to lag. Eastern consumption levels are dependent on public net financial transfers from West to East totalling about $65 billion per year, or over 4% of the GDP of western Germany. The German news magazine "Der Spiegel" estimates the total reunification costs between 1990 and 2003 at €1.25 trillion. In addition to social assistance payments, the government plans to extend funds to promote eastern economic development through 2019.

Primary sectors

In 2003 agriculture, forestry, and fishing accounted for only 1.1% of Germany’s gross domestic product (GDP) and employed only 2.2% of the population, down from 4% in 1991. Much of the reduction in employment occurred in the eastern states, where the number of agricultural workers declined by as much as 75% following reunification. However, agriculture is extremely productive, and Germany is able to cover 90% of its nutritional needs with domestic production. In fact, Germany is the third largest agricultural producer in the European Union (EU) after France and Italy. Germany’s principal agricultural products are potatoes, wheat, barley, sugar beets, fruit, and cabbages. From 1999 to 2003, the number of agricultural holdings declined by 11% to 421,400, reflecting a general trend toward consolidation. As of May 2004, Germany had a total of 448,000 cattle and 726,000 pigs, both figures down about 3% from the previous year.

Despite Germany’s high level of industrialization, roughly one-third of its territory is covered by forest. The forestry industry provides for about two-thirds of domestic consumption of wood and wood products, so Germany is a net importer of these items. In 2003 the forestry industry’s production equaled 51.2 million cubic meters of roundwood and 17.6 million cubic meters of sawnwood. As of 2004, an estimated 31% of trees in Germany showed signs of environmental damage, according to an annual report by the federal government. Germany’s ocean fishing fleet is active in the North Sea, the Baltic Sea, and the Atlantic Ocean between Britain and Greenland. The fleet, which has diminished in size in recent decades, contends with overfishing, extended exclusive fishing zones claimed by neighboring countries, and quotas imposed by the European Community Common Fisheries Policy. In 2003 the fishing industry’s total catch was 335.1 million tons.

Mining and minerals

Coal is Germany’s most important energy resource, although government policy is to reduce subsidies for coal extraction. Coal production has declined since 1989 as a result of environmental policy and the closing of inefficient mines in the former East Germany. As of October 2001, recoverable coal reserves were estimated at 72.8 billion short tons, the largest amount of any country in the then 15-member European Union (EU). The two main grades of coal in Germany are “hard coal” and lignite, which is also called “brown coal.” Unfavorable geological conditions make the mining of hard coal economically uncompetitive, but a slight increase has occurred in lignite production since 1999. Despite its considerable reserves, environmental restrictions have led Germany to become a net importer of coal. Non-energy-related mining recovers potash for fertilizer and rock salt for edible salt and the chemical industry. As of January 2004, proven oil reserves were 442 million barrels, a modest amount by international standards but still the fourth largest reserves in the EU. More than half of Germany’s domestic oil production is attributable to the offshore Mittelplate field along the western coast of the German state Schleswig-Holstein.

Also as of January 2004, proven natural gas reserves were 10.8 trillion cubic feet, the third largest in the EU. Nearly 90% of Germany’s natural gas production takes place in the state of Lower Saxony. In 2002 Germany imported 2.4 trillion cubic feet of natural gas, or 75% of its requirements. The most important source of natural gas imports is Russia, with a 40.8% share, followed by Norway at 31.5%, and the Netherlands at 22.3%.

Energy

In 2002 Germany was the world’s fifth largest consumer of energy, and two-thirds of its primary energy was imported. In the same year, Germany was Europe’s largest consumer of electricity; electricity consumption that year totaled 512.9 billion kilowatt-hours.

Government policy emphasizes conservation and the development of renewable energy sources, such as solar, wind, biomass, hydro, and geothermal. As a result of energy-saving measures, energy efficiency (the amount of energy required to produce a unit of gross domestic product) has been improving since the beginning of the 1970s. The government has set the goal of meeting half the country’s energy demands from renewable sources by 2050. In 2000 the government and the nuclear power industry agreed to phase out all nuclear power plants by 2021. However, renewables currently play a more modest role in energy consumption. In 2002 energy consumption was met by the following sources: oil (40%), coal (23%), natural gas (22%), nuclear (11%), hydro (2%), and other renewables (2%).

Industry

Industry and construction accounted for 29% of gross domestic product (GDP) in 2003, a comparatively large share even without taking into account related services. The sector employed 26.4% of the workforce. Germany excels in the production of automobiles, machine tools, and chemicals. With the manufacture of 5.5 million vehicles in 2003, Germany was the world’s third largest producer of automobiles after the United States and Japan, although China was threatening to displace Germany in the world rankings as early as 2005. In 2004 Germany enjoyed the largest world market share in machine tools (19.3%). German-based multinationals such as Daimler-Chrysler, BMW, Bosch, BASF, Bayer, and Siemens are marquee names throughout the world. What is less well known is the vital role of small- to medium-sized manufacturing firms, which specialize in niche products and often are owned by management. These firms employ two-thirds of the German workforce.

Service sector

In 2003 services constituted 70% of gross domestic product (GDP), and the sector employed 71.3% of the workforce. The subcomponents of services are financial, renting, and business activities (30.5%); trade, hotels and restaurants, and transport (18%); and other service activities (21.7%).

Tourism

Domestic and international tourism generates about 8% of gross domestic product (GDP) and 2.8 million jobs. Following commerce, tourism is the second largest component of the services sector. In 2004 Germany registered 45 million overnight stays by international tourists, 9% higher than in the previous year and an all-time record. In 2003 Germany ranked ninth in the world in international arrivals, with 18.4 million international tourists, versus 75 million in top-ranked France. In the same year, Germany registered a net outflow in the balance of payments related to tourism, as visitors spent US$ 24.6 billion, while German tourists outside the country spent US$ 68.3 billion. Tourism is a factor in Germany’s net deficit in the trade of services. Two-thirds of all major trade fairs are held in Germany, and each year they attract 9 to 10 million business travelers, about 20% of whom are foreigners. The four most important trade fairs take place in Hanover, Frankfurt, Cologne, and Düsseldorf. Germany’s hosting of the FIFA World Cup in 2006 presents an opportunity for the tourism sector.

Financial Services

By tradition, Germany’s financial system is bank-oriented rather than stock market-oriented. The process of disintermediation, whereby businesses and individuals arrange financing by directly accessing the financial markets versus seeking loans from banks acting as intermediaries, has not fully taken hold in Germany. One of the reasons that banks are so important in German finance is that they have never been subject to a legal separation of commercial and investment banking. Instead, under a system known as universal banking, banks have offered a wide range of services from lending to securities trading to insurance. Another reason for the strong influence of banks is that there is no prohibition of interlocking ownership between banks and their client companies. However, in January 2002 the government moved to discourage this practice and promote more rational capital allocation by eliminating the capital gains tax on the sale of corporate holdings from one company to another.

At the end of 2000, 2,713 out of 2,931 German financial institutions (92.6%) were universal banks, including 354 commercial banks, 1,798 credit cooperatives, and 561 savings banks. The non-universal banks specialized in such activities as mortgage banking and investments. The list of the six largest German banks illustrates the diversity of bank structure and ownership. Of the top six banks, ranked by total assets as of year-end 2002, four are private, but the fifth largest is public, and the sixth largest is a cooperative.

Despite the central role of banks in finance, stock markets are competing for influence. The Deutsche Börse (German stock exchange), a private corporation, is responsible for managing Germany’s eight stock markets, by far the largest of which is the Frankfurt Stock Exchange, which handles 90% of all securities trading in Germany. The leading stock index on the Frankfurt exchange is the DAX, which, like the New York Stock Exchange’s Dow Jones Industrial Average, is composed of 30 blue-chip companies. The other German stock exchanges are located in Berlin, Bremen, Düsseldorf, Hamburg, Hanover, Munich, and Stuttgart. Xetra is Germany’s electronic trading platform. As of the end of 2004, the total market capitalization of the German stock markets was nearly US$1.1 trillion, representing about 45% of gross domestic product (GDP). The shares of some 684 companies trade on the exchanges.

Recent stock market volatility has discouraged the development of an equity or shareholder culture, where individuals view stocks and mutual funds as promising alternatives to bank savings accounts or bonds as investments. In fact, by mid-2004 only 16.4% of the German population owned stock, down from 21% in early 2001. One failed experiment in the evolution of an equity culture was the Neuer Markt (New Market) exchange, which was intended to serve as the German equivalent to the United States’ technology-laden NASDAQ market. The Neuer Markt, which opened in 1997 during a euphoric period for technology investors, was designed to handle the initial public offerings of nascent German technology companies. By the fall of 2002, it had all but collapsed, having lost 96% of its value since the market peak. In September 2002, Deutsche Börse announced that it would shut down the niche exchange by the end of 2003. Although the Neuer Markt experience does not tell the whole story about German capital markets, the continued reliance on bank financing has negative implications for the creation of new companies and, in turn, jobs. So too, in the view of some observers, does resistance to restructuring of failing small-to-medium sized companies by foreign-run private equity and hedge funds.

Media & Advertising

The German TV market is divided into two parts: One the one hand the public standalone station ZDF and a network of publicly-funded television stations, broadcasting several regional and specialised channels as well as the cooperated ARD programme, on the other hand a large number of private television stations, mainly RTL (owned by Bertelsmann), Sat.1 and Pro7.

Bild is Europe's best-selling newspaper, dominating the German tabloid market. The most important subscription newspapers are Süddeutsche Zeitung and Frankfurter Allgemeine Zeitung, important news magazines are Der Spiegel and Stern.

The German advertising industry grew in 2005 by about 5%, after several years of stagnation. The outlook on 2006 is good, not least because of the 2006 FIFA World Cup, which will be hosted by Germany.

Trade

The United States is Germany's second-largest trading partner, and U.S.-German trade has continued to grow strongly. Two-way trade in goods and services totalled $88 billion in 2000. U.S. exports to Germany were $29.2 billion while U.S. imports from Germany were twice as high, $58.7 billion. At $29.5 billion, the U.S. trade deficit with Germany is the United States' fourth-largest, after the People's Republic of China, Japan, and Canada. Major U.S. export categories include aircraft, electrical equipment, telecommunications equipment, data processing equipment, and motor vehicles and parts. German export sales are concentrated in motor vehicles, machinery, chemicals, and heavy electrical equipment. Much bilateral trade is intra-industry or intra-firm.

German trade is consistent with the policy of the European Union (EU) to expand trade among the 25 member states and also with the goal of global trade liberalization through the latest Doha Round of the World Trade Organization (WTO). Germany uses its position as the world’s leading merchandise exporter—a fact that partially reflects the strength of the euro—to compensate for subdued domestic demand. German companies derive one-third of their revenues from foreign trade. Therefore, Germany is committed to reducing trade restrictions, whether involving tariffs or non-tariff barriers, and improving the transparency of foreign markets, including access to public works projects. The fact that Germany has exceeded the EU’s Stability and Growth Pact’s 3% limit on the budget deficit as a percentage of gross domestic product every year since 2002 has been an irritant in relations with the rest of the EU.

In 2003 Germany conducted slightly more than half of its trade within the then 15-member EU, followed by, in order of volume, developing countries, Eastern Europe (including countries like Poland that subsequently joined the EU), the United States and Canada, non-EU Europe (Switzerland, Norway, Liechtenstein, and Iceland), and Japan. Increasing emphasis is being placed on trade with Russia and China. The 2005 Hanover trade fair devoted much of its attention to Germany’s growing economic and trade ties to Russia, particularly in the area of energy. Germany is Russia’s top trade partner. In 2002 China overtook Japan as Germany’s top trade partner in Asia, and Germany is investing heavily in that rapidly rising economic power.

Exports and imports

In 2003 Germany imported US$601.4 billion of merchandise, while imports of goods and services totaled US$773.4 billion. Principal merchandise imports were motor vehicles (US$64.4 billion), chemical products (US$63.2 billion), machinery (US$41.8 billion), oil and gas (US$39.9 billion), and computers (US$30.5 billion). Germany’s main import partners were France (9.0%), the Netherlands (7.8%), the United States (7.3%), Italy (6.1%), the United Kingdom (6.1%), Belgium (4.9%), China (3.8%), and Austria (3.8%).

In 2003 Germany exported US$748.4 billion of merchandise, while exports of goods and services totaled US$873.3 billion. Principal merchandise exports were motor vehicles (US$145.5 billion), machinery (US$103.0 billion), chemical products (US$92.9 billion), electrical devices (US$36.2 billion), and telecommunications technology (US$35.1 billion). Germany’s main export partners were France (10.6%), the United States (9.3%), the United Kingdom (8.4%), Italy (7.4%), the Netherlands (6.2%), Austria (5.3%), Belgium (5.0%), and Spain (4.9%).

Germany's main exports:

Germany's main imports are:

CIA Factbook 2005

Balance of payments and currency

In 2003 the current account balance was a positive US$54.9 billion, or 2.2% of gross domestic product. In 2003 Germany posted a merchandise trade surplus of US$147 billion. In 2002 total public debt was about US$1.5 trillion, or 60.8% of gross domestic product.

Germany’s currency is the euro. As of July 12, 2006, one US dollar was equivalent to about 0.55 euros. Because Germany has adopted the euro, the Bundesbank, which had been responsible for conducting monetary policy and maintaining a stable German mark, has ceded much of its previous influence to the European Central Bank.

Foreign Investment

In 2003 net foreign direct investment was inbound US$11 billion.

Investments

Germany follows a liberal policy toward foreign investment. From 1995 to 1999, annual average flows of U.S. direct investment in Germany were $3.4 billion, while those of German investors in the United States reached $21 billion. Americans accounted for 18% of all foreign direct investment in Germany during 1998-99, the third-largest source after France and the UK. In terms of cumulative position (historical cost basis), German investment in the United States was valued at $111 billion in 1999, having more than doubled since 1995, while U.S. investment in Germany was worth just under $50 billion, having grown just 12% since 1995.

Despite persistence of structural rigidities in the labour market and extensive government regulation, the economy remains strong and internationally competitive, not least because of its highly skilled work force. Although production costs are high, Germany is still an export powerhouse. Additionally, Germany is strategically placed to take advantage of the rapidly growing central European countries. The current government has addressed some of the country's structural problems, with important tax, social security, and financial-sector reforms. In the future, Germany faces further fundamental (and perhaps even more sweeping) economic adjustments to boost growth and job creation.

Labour force

The distribution of Germany’s workforce by sector is very similar to the relative output of each sector. In 2004 the workforce was distributed as follows: agriculture, 2.2%; industry, 26.4%; and services, 71.3%. Participants in the workforce totaled 38.87 million. In March 2005, Germany’s seasonally adjusted national unemployment rate increased to 12%, or nearly 5.2 million people. Both statistics represented post-war records. Unemployment approached 20% in some states in the East, where high wages are not matched by productivity. However, by September 2005 overall unemployment had declined to 11.2%, or 4.65 million people. Germany's national unemployment rate is only partially comparable to unemployment rates in the United States or the United Kingdom, because it includes a significant share of part-timers, who work less than 15 hours a week. Everyone working less than 15 hours a week, who is seeking and available for a job with full social security insurance (normally full-time job or part-time above 15 hours a week), can be registered as unemployed. Around one quarter of Germany's national unemployment are underemployed part-timers.

A better base for international comparisons is the so called ILO unemployment rate, which is deduced from a monthly telephone survey and counts everyone as employed, who works at least one hour during the reference week. That's the way the United States or the United Kingdom and a lot of other countries calculate their unemployment rates. Seasonally adjusted ILO unemployment for Germany was 7.9% in April 2006 (comparable unemployment for former West Germany is around 6.5%). Private sector employment in former West Germany as a percentage of the total population is higher than in the United Kingdom and not much below the United States or Canada. This is an indicator that - beside statistical differences - sluggish growth as a result of stagnating domestic demand, lower public employment than in most anglo-saxon or scandinavian nations and the complete breakdown of the former socialist industries in former East Germany might be more important for the high official unemployment, than the often cited rigidities in the labour-market. A hint, that the german labour-market is more flexible than often believed is, that Germany has no legal minimum wage, except in construction, but the government is considering introducing one.

Additionally the percentage of so called "longterm sick" in Germany is significantly lower than in the United Kingkom, Sweden or the United States, countries with very low official unemployment rates. Financial support for sickness in these countries normally lasts longer, is easier to reach or is higher than aid for unemployment. Experts believe that many of these "longterm sick" are in reality discouraged workers, who have no perspective in the job market. Most of these people in Germany are registered as unemployed, because unemployment aid is not limited in duration and being "sick" is not more lucrative. ( In the United States the extremly high imprisonment rate - between six and ten times higher than in Western Europe - and the higher rate of persons in the military forces are other reasons for the lower unemployment rate.)

At the start of 2005, the seasonally adjusted number of registered unemployed persons initially showed another sharp increase. The considerable rise in the unemployment figures is largely due to the fact that former recipients of income support who now receive the new class-II unemployment benefit are registered as unemployed. This means that people who used to be numbered among the latent manpower reserve are now shown as registered unemployed persons. In particular, the labour-market statistics now include more unemployed young, older and low-skilled people. The unemployment rate peaked at 12.6% in March 2005, although it has gradually declined since then. Also, There are considerable regional differences in unemployment rates within Germany. The unemployment rate in eastern Germany, at 20.7%, is almost twice as high as the western figure of 10.4%, see: Job mobility portal of the European Union.

Other statistics

Investment (gross fixed): 17.6% of GDP (2004)

Household income or consumption by percentage share:

lowest 10%: 3.6%
highest 10%: 25.1% (1997)

Distribution of family income - Gini index: 28.3 (2000)

Agriculture - products: potatoes, wheat, barley, sugar beets, fruit, cabbages; cattle, pigs, poultry

Industrial production growth rate: 2.2% (2004 est.)

Electricity:

production: 560 TWh (2003)
consumption: 519.5 TWh (2003)
exports: 53.8 TWh (2003)
imports: 45.8 TWh (2003)

Electricity - production by source:

fossil fuel: 61.8%
hydro: 4.2%
other: 4.1% (2001)
nuclear: 29.9%

Oil:

production: 74,100 barrel/day (2003)
consumption: 2.891 million barrel/day (2003)
exports: 12,990 barrel/day (2003)
imports: 2.135 million barrel/day (2003)
proved reserves: 395.8 million barrel (1 January 2004)

Natural gas:

production: 21 billion m³ (2003)
consumption: 99.55 billion m³ (2003)
exports: 7.731 billion m³ (2003)
imports: 85.02 billion m³ (2003)
proved reserves: 293 billion m³ (1 January 2004)

Private financial assets: €4.07 trillion (2004)

Exports - commodities: machinery, vehicles, chemicals, metals and manufactures, foodstuffs, textiles

Imports - commodities: machinery, vehicles, chemicals, foodstuffs, textiles, metals

Reserves of foreign exchange & gold: $96.84 billion (2003)

Debt - external: NA

Economic aid - donor: ODA, $5.6 billion (1998)

Exchange rates:

Euro:

July 2005: 1.20 USD = 1 EUR

January 2000: 0.99 USD = 1 EUR

1999: 0.94 USD = 1 EUR

Deutsche Mark:

January 1999 1.69 USD = 1 DEM

1998 1 USD = 1.76 DEM

1997 1 USD = 1.73 DEM

1996 1 USD = 1.50 DEM

1995 1 USD = 1.43 DEM

References

- Germany

External links

OECD's Germany country Web site and OECD Economic Survey of Germany
Federal Statistical Office Germany
MySME Information for foreign SMEs in Germany (In English)
German Embassy, Economic Trends
Federal Foreign Office - Facts about Germany
Germany and the Future of the Transatlantic Economy, Policy Bulletin by the Atlantic Council of the U.S.
Germany’s growth performance in the 1990’s - Published by the European Commission and dealing with the influence of the reunification on German growth rates

Economy of Germany | European Union member economies

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