Why is the German economy doing so well?
Hacker-Pschorr Oktoberfest celebration. Photo: Mark Burger. Source: Wikipedia
After a decade of “Euro-sclerosis” and deep involvement in both the global financial crisis and the Euro crisis, the German economy seems to be moving again. Their economy grew over 2% last quarter, and has been trending higher. Unemployment is 5.6%, the lowest in the Euro-zone and lower than it’s been since the early ‘90s. That’s not supposed to happen when you have negative interest rates and inflation is just crawling along. What’s going on in Deutschland?
German Real GDP growth. Source: St. Louis Fed, OECD
Part of the answer is immigration. Two years ago, Angela Merkel decided to open Germany’s borders to Syrian refugees. In 2015 and 2016, Germany took in over a million immigrants – over 1% of its population. This is the largest influx of new residents since reunification over 20 years ago – and before that, since the early ‘60s, when Germany was the preferred destination for refugees from behind the Iron Curtain. The German government has expended significant resources to get asylum-seekers settled, integrate them into the workforce, and educate their children.
Such measures are costly. It’s estimated that Germany spends over 20 billion Euros on refugee-related issues – over 1.5% of their budget. That would be the equivalent of $100 billion here. But there’s a return on this investment. Immigrants consumer more, work more, and return more to their adopted country. It’s expected that the German economy is growing 0.25% faster than it otherwise would – $9 billion now, and that amount will compound, while expenditures will fall.
Source: St. Louis Fed, OECD
Developed economies have a long-term problem: they don’t produce enough young workers internally to sustain their long-term growth. In 2015, 28% of Germans were 60 or older, and they had the world’s second oldest workforce, after Japan. The logical solution is to bring in workers from other countries. From an economic perspective, that’s what Germany has done. Germany is now the second largest recipient of immigrants in the world. Financially, increased immigration is a good investment.
Douglas R. Tengdin, CFA