Why German economists are worried about too positive an economic outlook?

Amidst a lot of turmoil going on in Europe, the sun is shining on Germany – at least as far as the economic outlook is concerned. However, being perfectionist and pessimistic by nature, Germans never feel complacent with the situation and try to find a dark cloud to every silver lining! One would think.

Yesterday, Kiel-based IfW (Institute for World Economy) published its economic outlook for Germany. “German economy is approaching a boom territory” – it mentioned. Adjusted to the working days, the economy will grow at 2% in 2017. This is the sixth consecutive year of growth. The growth rate is at its highest since 2007 – pre-global financial crisis times. Public budgets are running surpluses and the industrial capacity utilization is already significantly above normal. The Government surplus reached the record level of EUR 20 Billion. The upswing in German economy is more broadly based. It is not driven purely by private consumption.

Corporate investments are picking up significantly, and growth is driven by exports. Capital expenditure on plant and equipment is likely to increase further over the next years.

What else do you need? You would think. But not the Germans! German economists are worried about overheating of the economy. Of course, overheating is a real macroeconomic phenomenon where production capacities cannot keep pace with the growing demand. This naturally, leads to inflation. And inflation is what Germans detest - having been through the hyperinflation era of 1920’s. Nonetheless, these are the problems of plenty.

India, on the other hand, is really striving for investment in the industry, and capital expenditure in plant and equipment. We want to increase our manufacturing share in the GDP from 15% to 25%. We are focused on improving the “ease of doing business”, improving physical and digital infrastructure, and are pressing ahead with reforms. In spite of all the efforts by the present Government, our private investment is not picking up. Germany is known to be a high-cost country. And yet they are achieving it. We must ask – why? What are they doing differently?

Here are some reasons, why Germany has consistently been able to overcome the high-cost disadvantage.

Germany’s focus on quality rather than purely on costs, high spend on R&D and innovation, education and skills development, pragmatic politics, consensus between industry and trade unions, collaboration between industry and universities on research, smart manufacturing initiatives like Industrie 4.0, promotion of green technologies, vision and long-term strategies, and synchronized efforts from all the sections of the society.

Reforms, infrastructure, and ease of doing business are essential but not sufficient factors. They provide an ecosystem, but something has to change from within.

And what about German pessimism? Well, they have a habit of hoping for the best but preparing for the worst. A lesson learned from the previous century! This lets Germans take challenging socio-economic situations in their stride, and also, not to get overly exuberant during the good times. An example to emulate? I think so!

(Source: IfW-News Release from 15th June 2017)