Germany’s Economy Chart Book - ING Think

Germany’s EconomyChart BookOn the brink of recession?Carsten Brzeski and Inga FechnerSeptember 2019

Germany’s Economy Chart Book1. Key takeaways2. How is the German economy doing?3. Germany’s weak spots4. External trade and the trade war5. What’s happening in the automotive sector?6. The German banking sector and its profitability7. Housing market: Still too cheap or bubbly?8. Migration and population9. Germany’s current political landscape10. What about Brexit?11. Digitization: Still in “Neuland”?2

Key takeawaysFrom stellar growth to the brink of a recession within less than a year. Germany needs more than good luck to return toEurope’s pole position The recent slowdown of the German economy has been a result of one-off, structural and external factors. Harsh winter weather, unusually high sickleave due to the flu, the timing of Easter, strikes and more recently, disruptions to commercial transport from low water levels, have all weighed onthe economy. At the same time, Germany continues to suffer from a lack of investment in digital and traditional infrastructure and has seen hardlyany significant new structural reform in the past 10 years. Add to that external uncertainties and the picture does not look too bright for the monthsto come. On a more positive note, fundamentals remain sound, interest rates are low and employment is at a record high. The future path of the economy clearly depends on which of these factors carries more weight. If one-off factors are mostly to blame, then a reboundof the entire economy looks plausible. If the problem is more structural, the German economy should be prepared for a long period ofunderperformance. Complacency is not an option. The German economy needs new investment and structural reforms. The recent announcement of a “Green Plan” is agood start but more is needed. As regards digitisation, Germany still has a long way to go before catching up with the global top performers.Improving the digital infrastructure is urgently needed. This is not only to get the German population up to speed but to ensure that German SME’sthe hidden champions- do not fall behind international competition.32018201920202021GDP t3.43.43.43.4Current account (% of GDP)7.37.16.86.5Government debt (% of GDP)60.957.455.052.0

How is the Germaneconomy doing?

Still the strong man of Europe?Average GDP ESource: Refinitiv Datastream, ING Economic & Financial Analysis5Euro ex DE

Economic sentiment keeps deteriorating 6

with the industrial sector already in recessionary territory The industry sector has seen a complete reversal within the short period of one year7

and demand starting to falterFor a long time, supply side constraints have been the limiting factors to production. Now, demand is emerging as themain limiting factor8

But the labour market remains strong The unemployment rate hit another post-reunification low. However, the labour market is losing steamGerman unemployment rate(% of active labour force)121086420Jan-91Jan-95Jan-99Source: Refinitiv Datastream, ING Economic & Financial Analysis9Jan-03Jan-07Jan-11Jan-15Jan-19

with wages growing and many unfilled job positions10

Lending conditions remain very favourable Credit growth to households and NFCs was broadly in line with nominal GDP growth11

and loans to corporates are on the rise12

But equipment is no longer a pressing factor limiting production13

Germany’s weakspots

Investment has remained low Investment in equipment and machinery(annual average growth, ro ex DESource: Refinitiv Datastream, ING Economic & Financial Analysis15DE

widening the gap with other eurozone countries Investment ratio% of GDP25201510502008-20132014-2017FranceSource: Eurostat, ING Economic & Financial Analysis16GermanyItalyGreeceSpainEurozone

The infrastructure is crumbling, Quality of 012Source: World Economic Forum Global Competitiveness Report, ING Economic & Financial Analysis17201320142015201620172018

digitisation could be expanded The Digital Economy and Society Index2019 ranking80706050403020100ConnectivitySource: European Commission18Human CapitalUse of InternetIntegration of Digital TechnologyDigital Public Services

and female labour market participation remains lowAvg. number of usual weekly hours of work, female2018Avg. number of usual weekly hours of EurozoneSource: eMaleFranceItaly

External trade andthe trade war

Germany’s main trading partnersChina and the US are among Germany’s main trading partners, with China being the most important one (exports imports)Top 10 export countriesTop 10 import dBelgiumAustriaCzech eFranceNetherlandsUSAChina050100150 bnSource: Refinitiv Datastream, ING Economic & Financial Analysis21050100150 bn

Germany’s trade balance is highForeign trade balance with Top 10 export elgiumNetherlandsChina-30-20-100102030405060 bn2008-2013Source: Refinitiv Datastream, ING Economic & Financial Analysis222014-2018

Cars and car parts remain Germany’s most important exportgoodTop 5 export goodsTop 5 import goodsMotor vehicles, trailers and semitrailersComputer, electronic and opticalproductsMachinery and equipmentOther goodsChemicals and chemical productsChemicals and chemical productsComputer, electronic and opticalproductsMachinery and equipmentElectrical equipmentCrude petroleum and natural gas050100150200250050100 bnExportsImports200250 bnImportsSource: Destatis, exports and imports (special trade) by division of the national Product Classification for Production Statistics 2018, preliminary results23150

How has the trade dispute impacted German exports?24

Many German cars are born in the USAGerman carmakers produce more vehicles in the US thanthey export there25Yet, the US are the main buyers for German vehicles andmotor vehicle parts

On a macro-level, no major impact on the EU economies isexpectedEffect of US unilateral auto import tariffs on GDP(import tariffs of 25% on cars, % of price-adjusted GDP)0.0-0.1-0.2-0.3MexicoCanadaHungarySouth KoreaLuxembourgIrelandGermanySlovakiaJapanCzech ndCyprusCroatiaGreeceUSA-0.4Source: ifo Institut, May 2018Source: ING Group ResearchWhen looking at the macro picture, the impact of car tariffs on individual economies seems to be small.26

What’s happening inthe automotivesector?

Benchmarking importance of cars to economy- Around 2% of total employment is in the automotive industry- Between 70% and 80% of automotives produced in Germany is exported- Between 7% and 8% of the German economy is directly and indirectly linked to theautomotive industry- Roughly one third of all investments into R&D stems from the automotive industry28

Sharp drop in vehicle manufacturing, no longer due to one-offfactors only29

Export engine – the money is earned %39%40%43%37%37%36%35%10%10%0%0%Domestic turnoverDomestic turnoverSource: Destatis30Foreign turnoverOther foreign countriesTurnover with Eurozone

Germany’s top 3 partners for exports and imports of motor carsTop 3 partners for extra EU-28 exports of motor cars bymember state, 2018 (%)Top 3 partners for extra EU-28 imports of motor cars bymember state, 2018 (%)TREGCHTHBYLYUACNXSMACHCHUACH USXSTRTR JPTRMA RUJPTWRUMATRKRJPTRTRJPJP JPCHKRTR TRJPKRKRKRKRTRKRJPKRFirst partnerSource: EurostatSecond partnerThird enUnited ited Kingdom031TRJPRUUSJPMXCNCN UATJALCHRUUSUSNZTRCHFOCNUAJP20JPCDBAMK CHCAJP 0100First partnerSecond partnerThird partnerOther

There still are growth islands for German carmakersExports (in bn euro)Exports, 00820092010UK20112012USA20132014China20152016East 1520162017East EuropeSource: Destatis. East Europe Poland, Czech Republic, Hungary. Motor vehicles, engines, bodywork, electronic equipment, other parts and accessories for motor vehicles322018

Domestic demand remains solid 33

but structural change is already happening Registration of new passenger cars in Germany ce: ed

even if the road ahead is longMarket share of newly registered passenger electric vehicles in selected European countries in 201860%50%40%30%20%10%0%Battery electric vehicleSource: EAFO35Plug-in hybrid electric vehicle

Who wants to use car sharing?Are you considering using car sharing within the next -6465 oder älterYes, and will use it as my primary mode of transportI already use car sharing services as my primary mode of transportYes, but only in addition to my primary mode of transportI am already using car sharing in addition to my primary mode of transportSource: ING International Survey, 20183625-34

How about car sharing in Europe?Are you considering using car sharing within the next anyPolandRomaniaSpainItalyYes, and will use it as my primary mode of transportI already use car sharing services as my primary mode of transportYes, but only in addition to my primary mode of transportI am already using car sharing in addition to my primary mode of transportSource: ING International Survey, 201837AustriaTurkey

What about Brexit?

No deal – Impact on Europe and GermanyGoods exports to UK(as % of country's GDP) 8%7% 6%5% 4%3%2% 1%0%20172018Source: Refinitiv Datastream, ING Economic & Financial Analysis. *Gross tonnage39Belgium, the Netherlandsand Ireland are particularlyexposed to a ‘no deal’ Brexitgiven their importance inBritish supply chains.Around 60% of the UK’smarine trade with Europe*goes to either Netherlands,Belgium or France.While major European portsare reportedly fairlyadvanced in theirpreparations, fewer plansappear to have been madeat UK terminals.The Netherlands is also theUK’s no. 1 source of ForeignDirect Investment from theEU, followed by Luxembourgand Germany.

Is Frankfurt winning the battle for London’s bankers?40

The German bankingsector and itsprofitability

The number of credit institutions in Germany continues to fall Credit institutions in GermanyNumber of ource: Deutsche Bundesbank42

and banks have seen better days regarding profitabilityCost-income ratio of German banksin % of operatingNet interest income (interest margin)1income176% of total 1420152016201756All banksCommercial banks54Savings banksCredit cooperativesMortgage banksLandesbankenBuilding and loan associationsBanks with special tasks2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017German banks431ExcludingSource: Deutsche Bundesbank, ING GermanySource: Deutsche Bundesbank, ING Germanythe total assets of the foreign branches of savings banks, excluding the total assets of the foreign branches of regional institutions of credit cooperatives until 2015 and, from 2016, excluding thetotal assets of the foreign branches of mortgage banks.

LatviaSlovakiaEstoniaMaltaCzech rgRomaniaSwedenUnited KingdomContraction in the banking sector is not just a German issueChange in number of credit institutions from previous year(2017 vs 2016)20100-10-20-30-40-50-60-70-80Source: EBF, ECB44

Internet banking is slowly on the rise in GermanyInternet use for internet banking% of individuals aged 16 to 74100908070605040302010020102018Source: Eurostat45Internet use is the number of people accessing the internet, usually expressed as a proportion of the population. In the context of the Community survey on ICT usage in households and by individuals on internet use within households,an internet user is defined as someone who has used the internet within the last three months, [ ] regardless of where they do so. Internet banking includes electronic transactions with a bank for payment etc. or for looking up accountinformation.

Housing market

Housing bubble or not?The trend seems to be clear 10015901280970660350020092011Equity, '000 Source: Interhyp472013LTV, %Fixed interest, years, rhs2015Redemption, %, rhs2017

Huge differences across countryBubble or no 02009LTV Berlin %Source: Interhyp4820112013LTV Bremen %20152017LTV Sachsen-Anhalt %2009LTV BaWü %20112013LTV Hamburg %20152017LTV Lower Saxony %

Migration andpopulation