An article in today's FT outlines some of the challenges the German economy is facing, with a large current account surplus and also low investment. The article identifies the economy's huge private sector investment gap as the country's biggest problem.
What does the article say about Germany's problem and the solution?
- Germany has seen the share of investment to GDP fall over time.
- A recent study calculated the economy has an investment gap of 3% annually or €80 billion, which has impacted growth. Much of this gap is in private sector.
- On the back of strong exports, German companies have been investing abroad to improve market access and diverisfy risk.
If we look to the UK we can see many similar problems and could almost substitute ‘Germany' with ‘the UK' in the article.
- Like Germany, the UK has had falling investment over time.
- Business investment remains 27% below it's pre-recession peak.
- We have also seen UK firms investing abroad to expand their reach into overseas markets
So what can be done about the investment problem?
Part of the problem was Germany's export success which contributed to companies taking their investment overseas. The article also points to the role of domestic economic policy as one of the contributors to the problem
- An uncertain regulatory environment,
- A tax system that could do more to encourage domestic taxation,
- Lack of important skills, and
- Reduced financial incentives leading to less innovation, investment and entrepreneurship.
All of these policy responses could equally apply to the UK. As we outlined in our Autumn Statement and in yesterday's blog, we want to see a really clear commitment to competitiveness and growth, a transparent plan from government on how they will achieve this, as well as measures to ensure progress is being made.