Steady labour costs and rising exports are two of the positives in an economy that, like many, is struggling for growth. Is it time you looked at doing business in Germany? Read our in-depth profile
How does the economy look?
The economy has been unable to escape from the continuing eurozone crisis and growth of just 0.6% is forecast in 2013. Despite the slowdown, German business confidence remains high. According to the Q2 Grant Thornton IBR results, 45% of businesses were optimistic about the economic outlook, compared with 34% in the UK and -8% across the eurozone.
However, despite the economy expanding by 0.7% in Q2, just 29% of German businesses are expecting to increase profits over the next 12 months, compared with 48% of UK peers, and down from 69% in Q2-2011.
Exports target the BRICS
Germany is the world’s third-largest exporter and the largest in Europe, ahead of the UK. Adopting the euro has undoubtedly helped by keeping the currency much weaker (thus making exports relatively cheaper abroad) than would have been the case with the deutschmark.
Germany ran the largest absolute trade surplus (in that it exported more than it imported) in the world in 2012 – €188 billion – led by large surpluses with France (€39 billion), the US (€36 billion) and the UK (€29 billion). Europe remains a key export destination: 69% of exports stay in the region, with 57% delivered to economies in the EU.
However, the reduced spending power of businesses and consumers on Germany’s doorstep means businesses have had to look further afield for export growth. In 2000, just 3.9% of German exports went to the BRIC economies. By 2012, this had risen to 11.7%. In 2020, these economies are expected to account for more than 24.3% of Germany’s exports. By contrast, just 5.6% of UK exports went to the BRICs in 2012, although this was up from 3.3% in 2007.
Labour market returns to strength
The German labour market is strong. The unemployment rate is just 5.3%, compared with 7.3% in the US, 7.7% in the UK and 12.1% across the eurozone.
Moreover, youth unemployment, which tops 50% in Greece and Spain and stands at more than 20% in both France and the UK, has actually dropped below 10% in Germany since the financial crisis, thanks largely to a vocational education system that keeps schooling tied closely to demand.
Things were not always so rosy, however.
A decade ago, Germany’s unemployment rate stood at more than 11%. Reunification brought huge transfers to the East and soaring wages. The Government embarked on ‘Agenda 2010’, a series of tough labour reforms – including the elimination of low salary payroll taxes and a flat-rate benefit that encouraged the long-term jobless back into work – that freed up the job market.
One of the knock-on effects was years of wage constraint: German wages did not rise in real terms in the period 2001-10. More recently, German firms have been comparatively restrained – French unit labour costs increased by more than 15% between 2005 and 2012, almost double that of Germany (8%). There is no national cross-sector minimum wage, but it does exist for a small number of occupations.
Germany is a democratic, federal, multiparty republic. This means that the federal government (‘Bund’) shares power with 16 states (‘Bundesländer’). German government debt is low by eurozone standards at around 57% of GDP, well below France (86%) and the UK (88%).
The niche, productive Mittelstand
The German Mittelstand model refers to the cadre of small and medium-sized businesses that are often privately owned, based rurally, export-oriented and focused on innovative, high-value manufacturing. Most also have a focus on long-term profitability, as opposed to annual or quarterly reporting. They account for 52% of GDP and employ 61% of workers, similar to the contribution of the UK SME sector (although 21.3% more productive).
The focus of the Mittelstand is unusual, however. Research suggests it contains 1,307 ‘hidden champions’ – global market leaders that have successfully found niches for their products, predominantly in electrical engineering and industrial products. This compares to 366 in the US, 75 in France and 67 in the UK.
Consequently, their international footprint is large. Exports from the Mittelstand rose by 29.5% in the last decade to €186.1 billion and now account for 19% of all German exports. By contrast, UK SME exports amount to €115 billion or 40% of the total.
Germany’s corporate income tax rate is 15% but, due to the addition of a solidarity surcharge and local trade tax, the prevailing corporate tax rate averages around 29%. VAT is charged at a standard rate of 19% and a reduced rate of 7%.
Germany ranked 17th in the 2013 Grant Thornton Global Dynamism Index – which ranks the dynamism of business growth environments around the world – behind China (3) and the US (11), but ahead of France (22) and the UK (34). It dropped from 9th in 2012 due to a fall in economics and growth (43), but scores well for science and technology (10) and business operating environment (16).
View from Germany
Klaus-Günter Klein is managing partner of Warth & Klein Grant Thornton, Germany. He says: “As an export champion Germany is highly dependent on the economic situation of its trading partners, which makes an assessment difficult. For the second half [of 2013] I expect moderate growth and a slight decrease in unemployment.
“[Germany’s strengths] are its great infrastructure and, of course, a very well-educated workforce. And third, a keen awareness of quality. German engineering has a very good reputation worldwide.
“There are three things to consider when doing business in Germany. First, foreign companies must adjust to a lack of skilled workers. Second, Germany now offers a very attractive climate for foreign direct investment. Third, do not talk about politics. It would be far better to talk about the resurrection of German football.”