The average (median, if you want to be accurate) age of a German is 46.1 years. This officially makes Germans the oldest people in the world. Im in no position to make any cheap jokes about this but it is worth asking what the implications might be for the economy in general and our pet topic, the covered bond market in particular.
It might be a stereotype but Germans really do have (and have had for a long time) a high saving ratio. Consumption has always been weak given how strong the economy is. Naturally this imbalance translates into exports (if locals wont consume enough we have to sell to foreigners) and therefore to a high (excessive?) current account surplus of over 8%. European Commission guideline is that 6% should be the upper bound. As a result, Germany is obviously highly dependent on the growth rate of its export markets. The fact that so many German goods are either capital goods or luxury items just exacerbates the gearing of German growth to everyone elses growth.
To continue to grow GDP at 2% per annum Germany either needs higher domestic consumption or improvements in its export markets growth. The recent introduction of a minimum wage and other belt-loosening reforms might help the former a little but loose monetary policy in the Eurozone such an anathema to Germany policy makers is the only way that Germany can keep its currency competitive (outside the Eurozone) and keep economies buoyant enough to buy German goods (inside the Eurozone).
Then there is Germanys pension problem. Germany experienced the latest post-war baby boom in Europe for obvious enough reasons and the largest cohort of the German population is now just turning 65 - retirement age. Time for the pension funds to stop accumulating and start distributing.
The need for pesions is exacerbated in Germany by the fact that Germany hasnt embraced the anglo-saxon model of home ownership (buy your house when you are young, pay for it before your retire), so housing costs have to be taken into account in levels of pensions.
But if mature pension schemes have to be focussed on low risk fixed income assets as the actuaries tell us they do then negative interest rates in the low risk parts of the Eurozone are going to be an increasing problem for German pension funds.
Put simply the bund and pfandbrief coupons arent going to pay the rent of all of those pensioners.
Supporting foreign growth, loose monetary policy, encouraging more domestic consumption and reducing the parochialism of pension funds. People in their mid-40s are notoriously unwilling to embrace change. Sounds like they might have to though.
I will be discussing all of these issues and more at the German economy panel at the Euromoney Germany conference later this week. I hope you can join us there.
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