Germany: Thrifty and risk averse

Transcription

1 ECONOMIC RESEARCH DEPARTMENT Germany: Thrifty and risk averse High savings by households and enterprises pushed the current account surplus to 8.6% of GDP in 2015, a new historical high. The rise in household savings is partly related to population ageing. Despite substantial profit growth, enterprises remain reluctant to step up investment. Instead they have used a substantial part of their financial resources for strengthening their position in the global value chains. Without change in policy, Germany s saving surplus is expected to remain high in the coming years. The lack of investment is harmful for the country s growth potential. A record current account surplus The recently published 2015 Flow of Funds statistics for Germany are very useful for economic analysis, as they show how the different sectors have allocated their financial surpluses/deficits to the different asset classes. By definition, the sum of the current and capital account balances in the balance of payments is equal to the net lending/borrowing of a country to/from the rest of the world. If it is positive, the country lends to the rest of the world and vice versa. In 2015, the German current account surplus rose to 8.6% of GDP from 7.4% in 2014 (Figure 1). This is a new historical high. The main contributors to the surplus are the household sector and non-financial corporations. The accounts for the government sector and the financial sector were close to balance. Germany s high current account surplus is a rather controversial issue. Many consider it to be an important factor behind the euro zone s sluggish growth performance. 1 Last February, it also attracted the attention of the European Commission in the in-depth study on the macroeconomic imbalances of the German economy. The Commission attributed the high and persistent current account surplus partly to weak investment and concluded that this poses risks for the future growth potential of the German economy. The Commission calls for further action to facilitate conditions for private investment. We fully share this analysis. 1See f.e. Martin Wolf, Germany is the eurozone s biggest problems, Financial Times 11 May Households and corporates are major savers Financial surpluses (as % of GDP) of Households Government Non-Financial Enterprises Financial Sector Current Account Figure 1 Sources: Deutsche Bundesbank, Destatis Households: Saving for retirement Despite the decline in interest rates in 2015, household increased their savings to 9.7% of net disposable income compared to 9.5% in The relatively high savings rate the average savings rate in the EU is around 4% is partly related to population ageing. In particular from the mid-2000s, the savings rate gradually increased to reach 10.5% in 2008, stimulated by the introduction of the Riester pensions that replaced part of the public pension scheme. In the wake of the financial crisis, the savings rate declined to 9.1% in 2013, as households wished to maintain their consumption. As the pace of economic growth has picked up since 2014, the savings rate is edging higher again. German households have traditionally been rather risk adverse. They have held almost 40% of their assets in currency and deposits (Figure 2). Moreover, almost 40% of household financial assets are in guaranteed benefit schemes. The guaranteed minimum rate of return for life insurance contracts currently set at 1.25% makes this form of saving very attractive. In 2015, because of the strong demand for German Bunds, particularly from the ECB, the yield curve shifted lower and by the end of the year, a large part was in negative economic-research.bnpparibas.com Raymond Van Der Putten 8 June

2 territory. The yield on the 10-year Bund amounted to only 0.6%. This trend has continued in End May, the 10-year Bund yield even declined to 0.17%. If this situation persists, it is virtually certain that the Finance Minister will reduce the guaranteed minimum rate of return once again. Households increase their pension savings Currency and deposits Debt securities Equities Pensions, insurance and guarantees Other Looking for higher yields, household have reduced their holdings of debt securities and saved less in deposits. This has benefited riskier asset classes such as equity that saw its share in the household portfolio rising to 19.6% in 2015, almost 1 percentage point higher than in In particular, household have increased their equity holdings in investment funds, which invest the bulk of their cash flows in foreign enterprises. Compared to other countries, German households prefer savings plans with guaranteed returns such as life insurance savings (Figure 3). However, in terms of risk averseness, they are beaten by the Japanese. Despite the low interest rate environment, these households hold more than half of their financial assets in currency and deposits. Only recently, under the influence of Abenomics, they have increased their equity holdings. By contrast, US households keep less than 15% in the form of deposits. In addition, they hold almost 50% of their financial assets in the form of equity, directly or indirectly, against 32% in pension plans. Non-financial enterprises: A bumper year In 2015, the financial surplus of the non-financial corporate sector increased to 3.9% of GDP, 0.9 percentage point higher than in the preceding year. This good performance is confirmed by the Bundesbank s consolidated financial statement statistics for listed enterprises. It reported that up to 2015 Q3, earnings before interest, taxes, depreciation and amortisation (EBITDA) increased by 5.7% on the year. Listed enterprises reported a strong increase in sales. In the nine months to September, sales were 7.7% higher from a year earlier. In addition, profit margins improved as companies benefited from a fall in capital costs and lower prices for primary commodities and intermediate goods. Moreover, the depreciation of the euro allowed exporters to widen their margins without affecting price competitiveness on markets outside the euro area. On the other hand, labour costs increased strongly, partly because of the introduction of the national minimum wage. The latter was in particular felt in the services sectors. In addition, profits were dented by one-off factors such of the substantial provisions set aside in the car industry following the diesel emission scandal. In 2015, the total financing requirement of non-financial corporations increased to EUR 531 billion (17% of GDP) compared with EUR 376 billion in the previous year (Figure 4). Most of it was internally funded. As usual, the largest contribution came from the depreciation of the capital stock. This has steadily increased in line with the growing capital stock. The other component of internal funding is retained earnings, which is largely dependent on the business cycle. In 2015, external financing rebounded after the sharp decline in 2014, as the low interest rate environment prompted companies to increase their borrowing (Figure 5). Loan financing clearly dominated with market financing only playing a modest role. Figure 2 Source: Deutsche Bundesbank German households are rather risk adverse Currency and deposits Debt securities Equities Pensions, insurance and guarantees Other Figure 3 Source: National central banks This is partly due to the structure of Germany s corporate sector, characterised by SMEs without direct access to the capital market. These enterprises often maintain long-term lending relationships with just one bank, the so-called house ban. 2 These banks have privileged access to information, which reduces the enterprises financing costs. Nonetheless, over the past fifteen years, domestic bank loans have increasingly be replaced by lending within the corporate sector. This movement has been driven by the formation of large international enterprises which have centralised their liquidity and finance management. In addition, these international oriented enterprises are also seeking loans from foreign banks. Developments in the banking sector have also contributed to the shift in corporate financing. Banks have reduced their lending due to the tightening of credit standards and rising requirements under the Basel Agreement. 2 Celine Choulet, German Sparkassen: a model to follow?, Conjoncture, April economic-research.bnpparibas.com Raymond Van Der Putten 8 June

3 Finally, the low level of market lending in German may be related to the rapid growth of the corporate Schuldschein (CSSD). CSSD loans are unlisted and unregistered bilateral loan agreements which only require limited documentation. In the Flow of Funds accounts they are classified as loans, but in practice they are similar to bonds. For example, CSSD loans are freely and simply transferrable. However, as the liquidity of the secondary market is limited, most are held to maturity. The total market volume of CSSD is estimated EUR 19 billion in 2015, about 12% of total corporate loans. 3 Despite the good earnings performance and the low interest rates, German enterprises hardly increased their capital spending. In 2015, gross capital formation of the non-financial corporate sector was only 0.3% higher than the previous year. Investment as a percentage of GDP amounted to only 10.1%, about 2 percentage points lower than between 2005 and The lacklustre capital spending is not typical for Germany, but observed in many OECD countries. This indicates that some common factors might be at work. For the IMF, the main factors that are holding back business investment are weak economic activity, financial constraints and policy uncertainty. 4 According to the European Commission survey, capacity utilisation in Germany has been equal or below 85% since Q2 2012, compared with 88% in the period (Figure 6). In Q1 2016, the utilisation rate decreased by 0.4 percentage point to 84.6%. The German investment climate is also affected by the lack of skilled labour. In the OECD Business and Finance Outlook 2015, it is argued that stock markets reward companies that favour dividends and buybacks and punish those that undertake more investment. This could make managers reluctant to invest, as their remuneration is often narrowly linked to the stock market performance. Instead of increasing their capital stock, German enterprises have used a substantial part of their financial resources to strengthen their presence in global value chains. Large companies have been offshoring production to Eastern Europe and other emerging economies, often through joint-ventures and various forms of collaboration. In 2015, non-financial corporations increased their equity holdings by EUR 31 billion to EUR 1950 billion in The Flow of Funds accounts lack detail on the part of foreign equity investment by the nonfinancial sector, but data for overall external investment gives an indication of the rapid global expansion of German enterprises. In 2015, Germany s external investment reached EUR 2292 billion or 75% of GDP in 2015, almost twice the amount invested in At the same time, equities held by foreigners in German financial and non-financial enterprises increased to EUR 1317 billion compared with EUR 590 billion in In addition, German enterprises have considerably increased their cash holdings as part of a global trend towards greater liquidity holdings in the corporate sector. This is partly for precautionary reasons. In Germany, cash holdings also increased because of the 2000 tax reform, which gave more favourable treatment to earnings retention. Cash balances Financing of non-financial corporations Figure 4 Depreciation Retained Earnings External Financing Source: Deutsche Bundesbank External financing of NFCs Loans from MFI Loans from non-mfi Debt securities Shares and other equity Other including trade credits Total external financing Figure 5 Source: Deutsche Bundesbank No shortage of capacity Fixed investment (y/y, %) Capacity utilization rate (RHS) Figure 6 Source: Destatis, European Commission 3 The use of trade credits has also been used more extensively in recent years. However, the non-financial corporate sector is also a major provider of trade credits, the net effect on the other sectors is limited. 4 IMF, Private Investment: What s the Holdup, in World Economic Outlook, April economic-research.bnpparibas.com Raymond Van Der Putten 8 June

4 increased from 8.7% of assets in 2000 to more than 12% during the period In the following years, cash holdings were gradually reduced to 10.8% in However, in 2015, cash holdings rebounded, partly due to provisions related to the diesel exhaust scandal. Finally, short and long-term lending by the non-financial sector has substantially increased from 7.3% of total assets in 2000 to close or more than 12% after In 2015, the expansion was mainly due to increased loans to foreign subsidiaries: EUR 18.4 billion compared with EUR 4 billion in New policies needed to reduce saving surplus In the coming years, household savings are likely to increase further, partly due to increasing pension savings. According to economic theory, a fall in interest rates should discourage saving. However, as it reduces expected retirement wealth, working households may want to step up their savings to maintain their required income after retirement. In our scenario, the net savings rate is projected to remain close to 10%. Germany is unable to absorb these savings. The industrial investment survey points only to a modest increase in capital spending in the manufacturing sector. Nevertheless, the surplus of the non-financial corporate sector may decrease as profits come under pressure due to generous pay settlements. In addition, the government sector is unlikely to absorb the excess savings of the household sector, as it aims at a balanced budget, as prescribed by the German constitution. As a result, the surplus on the current account may ease only slightly although remaining close to 8% of GDP. This is also the conclusion of the recent IMF Article IV mission to Germany. The main question that needs addressing is why the German economy is not stepping up investment even though interest rates are so low or even negative in some cases, whereas the need for new investment, in particular in public infrastructure, is so high. This calls into question the wisdom of the balanced budget policy. The IMF article IV mission calls for the removal of some bottlenecks in infrastructure spending in particular at the municipal level. Also the expansion of public and private partnership through Partnerschaften Deutschland would be helpful. This could also help in drawing more capital from institutional investors for infrastructure investment. Finally, the IMF calls for making more publicly-owned land available for housing construction and the loosening of zoning restrictions. The fiscal pump priming in combination with structural reforms might enhance Germany s growth potential and stimulate private investment. Raymond Van der Putten raymond.vanderputten@bnpparibas.com economic-research.bnpparibas.com Raymond Van Der Putten 8 June

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