Germany’s Economy Chart Book

Carsten Brzeski and Inga Fechner

On the brink of recession?

September 2019

1. Key takeaways

2. How is the German economy doing?

3. Germany’s weak spots

4. External trade and the trade war

5. What’s happening in the automotive sector?

6. The German banking sector and its profitability

7. Housing market: Still too cheap or bubbly?

8. Migration and population

9. Germany’s current political landscape

10. What about Brexit?

11. Digitization: Still in “Neuland”?

2

Germany’s Economy Chart Book

• The recent slowdown of the German economy has been a result of one-off, structural and external factors. Harsh winter weather, unusually high sick leave due to the flu, the timing of Easter, strikes and more recently, disruptions to commercial transport from low water levels, have all weighed on the economy. At the same time, Germany continues to suffer from a lack of investment in digital and traditional infrastructure and has seen hardly any significant new structural reform in the past 10 years. Add to that external uncertainties and the picture does not look too bright for the months to come. On a more positive note, fundamentals remain sound, interest rates are low and employment is at a record high.

• The future path of the economy clearly depends on which of these factors carries more weight. If one-off factors are mostly to blame, then a rebound of the entire economy looks plausible. If the problem is more structural, the German economy should be prepared for a long period of underperformance.

• Complacency is not an option. The German economy needs new investment and structural reforms. The recent announcement of a “Green Plan” is a good start but more is needed. As regards digitisation, Germany still has a long way to go before catching up with the global top performers. Improving the digital infrastructure is urgently needed. This is not only to get the German population up to speed but to ensure that German SME’s-the hidden champions- do not fall behind international competition.

Key takeaways

3

From stellar growth to the brink of a recession within less than a year. Germany needs more than good luck to return to Europe’s pole position

2018 2019 2020 2021

GDP growth 1.4 0.6 1.0 1.2

Inflation 1.9 1.5 1.4 1.6

Unemployment 3.4 3.4 3.4 3.4

Current account (% of GDP) 7.3 7.1 6.8 6.5

Government debt (% of GDP) 60.9 57.4 55.0 52.0

How is the German economy doing?

Still the strong man of Europe?

5

Source: Refinitiv Datastream, ING Economic & Financial Analysis

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2008-2013 2014-2018

Average GDP growth

(%)

DE Euro ex DE

Economic sentiment keeps deteriorating…

6

7

…with the industrial sector already in recessionary territory…

The industry sector has seen a complete reversal within the short period of one year

8

…and demand starting to falter

For a long time, supply side constraints have been the limiting factors to production. Now, demand is emerging as the main limiting factor

But the labour market remains strong…

9

The unemployment rate hit another post-reunification low. However, the labour market is losing steam

0

2

4

6

8

10

12

Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11 Jan-15 Jan-19

German unemployment rate

(% of active labour force)

Source: Refinitiv Datastream, ING Economic & Financial Analysis

10

…with wages growing and many unfilled job positions

11

Lending conditions remain very favourable…

Credit growth to households and NFCs was broadly in line with nominal GDP growth

12

…and loans to corporates are on the rise

But equipment is no longer a pressing factor limiting production

13

Germany’s weak spots

Investment has remained low…

15

Source: Refinitiv Datastream, ING Economic & Financial Analysis

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

2008-2013 2014-2018

Investment in equipment and machinery

(annual average growth, %)

Euro ex DE DE

…widening the gap with other eurozone countries…

16

Source: Eurostat, ING Economic & Financial Analysis

0

5

10

15

20

25

2008-2013 2014-2017

Investment ratio

% of GDP

France Germany Italy Greece Spain Eurozone

The infrastructure is crumbling,…

17

Source: World Economic Forum Global Competitiveness Report, ING Economic & Financial Analysis

4

4.5

5

5.5

6

6.5

7

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Quality of roads

(Value)

…digitisation could be expanded…

18

Source: European Commission

0

10

20

30

40

50

60

70

80

The Digital Economy and Society Index

2019 ranking

Connectivity Human Capital Use of Internet Integration of Digital Technology Digital Public Services

19

…and female labour market participation remains low

28

29

30

31

32

33

34

35

Eurozone Germany Spain France Italy

Avg. number of usual weekly hours of work, female

2018

Source: Eurostat

0

5

10

15

20

25

30

35

40

45

Eurozone Germany Spain France Italy

Avg. number of usual weekly hours of work

2018

Female Male

External trade and the trade war

21

Germany’s main trading partners

China and the US are among Germany’s main trading partners, with China being the most important one (exports + imports)

Source: Refinitiv Datastream, ING Economic & Financial Analysis

0 50 100 150

USA

France

China

Netherlands

UK

Italy

Austria

Poland

Switzerland

Belgium

€bn

Top 10 export countries

0 50 100 150

China

Netherlands

France

USA

Italy

Poland

Czech Republic

Belgium

Switzerland

Austria

€bn

Top 10 import countries

Germany’s trade balance is high

22

Source: Refinitiv Datastream, ING Economic & Financial Analysis

-30 -20 -10 0 10 20 30 40 50 60

China

Netherlands

Belgium

Switzerland

Poland

Italy

Austria

France

UK

USA

€bn

Foreign trade balance with Top 10 export countries

2008-2013 2014-2018

23

Cars and car parts remain Germany’s most important export good

0 50 100 150 200 250

Electrical equipment

Computer, electronic and optical

products

Chemicals and chemical products

Machinery and equipment

Motor vehicles, trailers and semi-

trailers

€bn

Top 5 export goods

Exports Imports

0 50 100 150 200 250

Crude petroleum and natural gas

Machinery and equipment

Chemicals and chemical products

Other goods

Computer, electronic and optical

products

€bn

Top 5 import goods

Imports

Source: Destatis, exports and imports (special trade) by division of the national Product Classification for Production Statistics 2018, preliminary results

24

How has the trade dispute impacted German exports?

25

Many German cars are born in the USA

German carmakers produce more vehicles in the US than they export there

Yet, the US are the main buyers for German vehicles and motor vehicle parts

On a macro-level, no major impact on the EU economies is expected

26

-0.4

-0.3

-0.2

-0.1

0.0

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Ind

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Ind

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Po

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Sw

itze

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nd

Cy

pru

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Cro

ati

a

Gre

ece

US

A

Effect of US unilateral auto import tariffs on GDP

(import tariffs of 25% on cars, % of price-adjusted GDP)

Source: ifo Institut, May 2018 Source: ING Group Research

When looking at the macro picture, the impact of car tariffs on individual economies seems to be small.

What’s happening in the automotive sector?

- Around 2% of total employment is in the automotive industry

- Between 70% and 80% of automotives produced in Germany is exported

- Between 7% and 8% of the German economy is directly and indirectly linked to the automotive industry

- Roughly one third of all investments into R&D stems from the automotive industry

Benchmarking importance of cars to economy

28

29

Sharp drop in vehicle manufacturing, no longer due to one-off factors only

30

Export engine – the money is earned abroad

42% 41%39% 40%

43%

37% 37% 36% 35% 36% 35%37% 36% 35%

58% 59% 61% 60%57%

63% 63% 64% 65% 64% 65% 63% 64% 65%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Domestic turnover Foreign turnover

42% 41% 39% 40%43%

37% 37% 36% 35% 36% 35% 37% 36% 35%

24% 23%24% 23%

23%

22% 21%18%

16%18% 18%

20% 21% 21%

34% 36% 37% 37% 35% 41% 42% 47% 48% 47% 47% 43% 43% 44%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Domestic turnover Turnover with Eurozone

Other foreign countries

Source: Destatis

31

Germany’s top 3 partners for exports and imports of motor cars

JP

TR

KR

KR

USKR

KR

TR

JPTR

TR

TR

JP

JP

US

CHKR

JP

KRJP

KRTR

TR TRKR

KR

KR

KR

MX

JP

JP

TR

MXJP

JP

JP

KR

MA

KR

KR

KR

RU

RU

TW

JP KR

JPTR

JP

KR

JPMA RU

JP

JP

JP

TR

CH

RU

JP

ZA TR

TR

KR

TR

KR

XS

XS

TR

US

CH

US

TR

TR

TR KR

TR

JP

MA

KR

CH

TR

US

TR

0

20

40

60

80

100

Be

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m

Bu

lga

ria

Cze

chia

De

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Ge

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Est

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Ire

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Sp

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Top 3 partners for extra EU-28 imports of motor cars by

member state, 2018 (%)

First partner Second partner Third partner Other

US

MK

IL

FO

US

RUNG

MK

TRCH

BAUS

EG

CN

BY

CNXS

LY

CH US

TR

CN

TR XS

US

RU

US

USCH

TR

CH

IS

CN

CHCD

AL

US

DZ

AL

JP TH

RU

UA

TH

UA

EG

XSCH

UA

CH

ZA

BA

CN

CA

CN

CN

JP

CH

TR

NO

JP

CN

US

IL

CH

NO

ME

CN

NZ

UA

TJ

JP

TR

SG

US JP

CH

ZA

MA

CN

RU

NO

NO JP

0

20

40

60

80

100

Be

lgiu

m

Bu

lga

ria

Cze

chia

De

nm

ark

Ge

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ny

Est

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Ire

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Sp

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Cro

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Top 3 partners for extra EU-28 exports of motor cars by

member state, 2018 (%)

First partner Second partner Third partner Other

Source: Eurostat

32

There still are growth islands for German carmakers

0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Exports (in bn euro)

UK USA China East Europe

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Exports, %YoY

UK USA China East Europe

Source: Destatis. East Europe = Poland, Czech Republic, Hungary. Motor vehicles, engines, bodywork, electronic equipment, other parts and accessories for motor vehicles

33

Domestic demand remains solid…

…but structural change is already happening…

34

0

10

20

30

40

50

60

70

2014 2015 2016 2017 2018

Registration of new passenger cars in Germany (%-share)

petrol-powered diesel-powered alternatively-fuelled

Source: KBA

…even if the road ahead is long

35

Source: EAFO

0%

10%

20%

30%

40%

50%

60%

Market share of newly registered passenger electric vehicles in selected European countries in 2018

Battery electric vehicle Plug-in hybrid electric vehicle

Who wants to use car sharing?

36

Are you considering using car sharing within the next year?

Source: ING International Survey, 2018

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

18-24 25-34 35-44 45-54 55-64 65 oder älter

Yes, and will use it as my primary mode of transport I already use car sharing services as my primary mode of transport

Yes, but only in addition to my primary mode of transport I am already using car sharing in addition to my primary mode of transport

How about car sharing in Europe?

37

Are you considering using car sharing within the next year?

Source: ING International Survey, 2018

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Belgium Czech

Republic

Luxembourg Austria United

Kingdom

Netherlands France Germany Poland Romania Spain Italy Turkey

Yes, and will use it as my primary mode of transport I already use car sharing services as my primary mode of transport

Yes, but only in addition to my primary mode of transport I am already using car sharing in addition to my primary mode of transport

What about Brexit?

No deal – Impact on Europe and Germany

39

0%

1%

2%

3%

4%

5%

6%

7%

8%

Goods exports to UK

(as % of country's GDP)

2017 2018

• Belgium, the Netherlands and Ireland are particularly exposed to a ‘no deal’ Brexit given their importance in British supply chains.

• Around 60% of the UK’s marine trade with Europe* goes to either Netherlands, Belgium or France.

• While major European ports are reportedly fairly advanced in their preparations, fewer plans appear to have been made at UK terminals.

• The Netherlands is also the UK’s no. 1 source of Foreign Direct Investment from the EU, followed by Luxembourg and Germany.

Source: Refinitiv Datastream, ING Economic & Financial Analysis. *Gross tonnage

Is Frankfurt winning the battle for London’s bankers?

40

The German banking sector and its profitability

42

The number of credit institutions in Germany continues to fall…

3,578

1,783

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Credit institutions in GermanyNumber of institutions

Source: Deutsche Bundesbank

43

…and banks have seen better days regarding profitability

1Excluding the total assets of the foreign branches of savings banks, excluding the total assets of the foreign branches of regional institutions of credit cooperatives until 2015 and, from 2016, excluding the total assets of the foreign branches of mortgage banks.

0

0.5

1

1.5

2

2.5

2011 2012 2013 2014 2015 2016 2017

Net interest income (interest margin)1

% of total assets

All banks Commercial banks

Savings banks Credit cooperatives

Mortgage banks Landesbanken

Building and loan associations Banks with special tasks

Source: Deutsche Bundesbank, ING Germany

54

56

58

60

62

64

66

68

70

72

74

76

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Cost-income ratio of German banksin % of operating income1

German banksSource: Deutsche Bundesbank, ING Germany

44

Contraction in the banking sector is not just a German issue

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

Ge

rma

ny

Ita

ly

Hu

ng

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Au

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Fra

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Cy

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Fin

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d

De

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Lit

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Be

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Ne

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Po

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La

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Est

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Gre

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Lu

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Ro

ma

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Sw

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Un

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Change in number of credit institutions from previous year (2017 vs 2016)

Source: EBF, ECB

Internet banking is slowly on the rise in Germany

45

0

10

20

30

40

50

60

70

80

90

100

Internet use for internet banking

% of individuals aged 16 to 74

2010 2018

Internet use is the number of people accessing the internet, usually expressed as a proportion of the population. In the context of the Community survey on ICT usage in households and by individuals on internet use within households, an internet user is defined as someone who has used the internet within the last three months, […] regardless of where they do so. Internet banking includes electronic transactions with a bank for payment etc. or for looking up account information.

Source: Eurostat

Housing market

Housing bubble or not?

47

0

3

6

9

12

15

50

60

70

80

90

100

2009 2011 2013 2015 2017

The trend seems to be clear…

Equity, '000€ LTV, % Fixed interest, years, rhs Redemption, %, rhs

Source: Interhyp

48

Huge differences across country

Source: Interhyp

40

45

50

55

60

65

70

75

80

85

90

2009 2011 2013 2015 2017

…or no bubble?

LTV BaWü % LTV Hamburg % LTV Lower Saxony %

40

45

50

55

60

65

70

75

80

85

90

2009 2011 2013 2015 2017

Bubble…

LTV Berlin % LTV Bremen % LTV Sachsen-Anhalt %

Migration andpopulation

Although the number of asylum applications has declined...

50

Source: Refinitiv Datastream, ING Economic & Financial Analysis. Unreported data from October 2018 onwards for all but Afghanistan and Eritrea.

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

Countries of origin of asylum applications

First-time asylum applications

Syria Afghanistan Iraq Eritrea all other nationalities

...integration could be cumbersome…

51

…at least judging from other experiences

52

0

10

20

30

40

50

60

70

80

90

100

Belgium Sweden Norway Switzerland

Employment rate of asylum seekers by duration of stay in country in years

1>5 6>9 10>

A majority sees immigration as an opportunity

53

Source: Friedrich-Ebert Stiftung. Deviation of 100% due to rounding. Survey from March 2019, n=3000, eligible population of Germany

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Nationally oriented

Mobile center

Cosmopolitan

All

"Germany should understand immigration as an opportunity"

Totally agree Rather agree Do not know/No indication Rather do not agree Do not agree at all

Germany’s current political landscape

55

Sonntagsfrage: If there were federal elections next Sunday...

August 2019, % August 2018, %

26

14 14

7 7

25

7

0

5

10

15

20

25

30

CDU/CSU SPD AfD FDP Linke Greens Other

Source: Infratest dimap für ARD-Morgenmagazin

29

1817

89

14

5

0

5

10

15

20

25

30

CDU/CSU SPD AfD FDP Linke Greens Other

56

Climate change is becoming more important, not only in the EU

0

10

20

30

40

50

60

Most important issues facing the EU (%-EU)

Immigration

Climate change

Economic situation

The state of member states' public finances

Terrorism

The environment

Source: Eurobarometer Spring 2019

0 5 10 15 20 25 30 35 40

Government debt

Taxation

Economic situation

Unemployment

Terrorism

Crime

Rising prices/inflation/cost of living

Health and social security

Pensions

Education system

Immigration

Housing

Environment/climate change

Most important issues facing Germany at the moment

(%)

And Germans continue to be optimistic for the future of the EU

57

Digitisation: Still in “Neuland”?

Opinions on Germany’s competitiveness differ, but…

59

0

5

10

15

20

25

30

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Germany's placement in global competitiveness

Rank

World Economic Forum IMD World Competitiveness Center

…internet speed is too slow…

60

Source: Cable/https://www.cable.co.uk/broadband/speed/worldwide-speed-league/

0 10 20 30 40 50 60 70 80 90

Germany

Hungary

United States

Spain

Switzerland

Netherlands

Japan

Denmark

Sweden

Singapore

Taiwan

Average internet connection speed

Selected countries, Mbps, 2019

…also in companies

61

0 10 20 30 40 50 60 70 80

France (EU-min)

Italy

Greece

Cyprus

Germany

Portugal

Netherlands

Denmark

Sweden (EU-max)

Enterprises with fast internet access

all enterprises with 10 or more persons employed (%)

2017 2018

EU-28 = 48

Source: Destatis, Eurostat. Fast internet refers to fixed broadband connections with a contractually agreed data transfer speed of at least 30 megabits per second (Mbps).

Online sales and cloud computing are not widespread

62

Source: Destatis

0 10 20 30 40 50 60 70 80 90 100

Cloud Computing

Online sales

Fast internet

Social Media

Mobile broadband

Website

Fixed broadband

Companies in Germany who have...

%, 2017

Share of glass fibre remains low…

63

0% 10% 20% 30% 40% 50% 60% 70% 80%

Greece

Germany

Italy

France

United States

Netherlands

Turkey

OECD

Sweden

Japan

Korea

Ready for Industry 4.0?

Share of fibre connections in total broadband subscriptions (%)

2018 2017

Source: OECD Broadband Portal

…while costs remain high for what you get…

64

Source: OECD

0

2

4

6

8

10

12

14

16

18

20

GB per month, per mobile broadband subscription

2018 2017

…and not only for internet rates

65

Source: Eurostat, 2 500 kWh < Consumption < 5 000 kWh

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

Electricity price for households per 1 kWh in H2 2018

in Euro

Excluding taxes and levies All taxes and levies included

But Germany ranks highly for robotisation…

66

0 100 200 300 400 500 600 700 800

Czech Republic

Switzerland

France

Finland

Slovenia

Slovakia

Spain

Canada

Austria

Netherlands

Italy

Belgium

Taiwan

US

Denmark

Sweden

Japan

Germany

Singapore

Korea

Number of installed industrial robots

per 10,000 employees in manufacturing industry

2017 2016

Average world: 85

Source: IFR

…which eventually could change labour markets…

67

Managers

Professionals

Technicians and associate

professionals

Clerical support workers

Service and sales workers

Skilled agricultural, forestry and

fishery workers

Craft and related trades workers

Plant and machine operators and

assemblers

Elementary occupations

0%

2%

4%

6%

8%

10%

12%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Em

plo

ym

en

t g

row

th 2

01

3-2

01

7

(%-c

ha

ng

e)

Probability of computerisation

Employment growth and probability of computerisation in Germany

%

Source: ING Economic & Financial Analysis, Die Roboter kommen (doch nicht?), June 2018

…possibly having an impact on middle-class jobs

68

Source: ING-DiBa Economic & Financial Analysis, Die Roboter kommen (doch nicht?), June 2018

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Highly complex/complex occupations Skilled workers Elementary occupations

Employment growth in Germany

%-change, 2013-2017

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