Europe’s largest economy may see growth limited to 1% a year for decades
(Bloomberg) — As his workers raced to meet a recent deadline, Andre Schulte-Suedhoff did something he hadn’t done in more than 20 years — he joined the production line at his factory near Munster and spent his weekend screwing together air-filter equipment.
“That’s quite bizarre,” the 46-year-old executive said in an interview last month. But with the 200-strong workforce short of as many as 15 staff and financial penalties due if they failed to deliver, there was no other option, he said. For Schulte-Suedhoff’s family-owned firm, Schuko, and thousands of others across Germany, such bottlenecks are becoming increasingly common and increasingly damaging.
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“We could sell a lot more,” he added. “The main missing input is labor.”
According to modelling by a German government research institute, sometime round about now, the country’s 47 million-strong workforce is going to stop growing. Perhaps it already has.
And that moment will be the high-water mark of an economic super cycle that transformed a country ruined by war into a manufacturing powerhouse and one of the world’s richest countries. Whatever comes next, an era in which successive generations of Germans saw their living standards lifted by the steady expansion of the workforce is drawing to a close.
“Those days are over,” the development bank KfW declared earlier this year. “The foundation for further prosperity growth is crumbling.”
Without a major shift, Germany’s labor force will shrink dramatically in the coming years, undermining economic growth, boosting inflation pressures and posing especially tough challenges to the manufacturing firms like Schuko that are the backbone of Europe’s biggest economy. Over the next decade, the labor supply will shrink by 3 million people, or 7%, unless retiring Germans are replaced by a significant influx of migrants.
Just to stay flat, the country needs 400,000 newcomers a year. While this figure has been reached at various points in the past, migration to Germany has been boosted by refugees coming from countries including Syria and Ukraine. And after the experience of those years, voters are skeptical of promises that migration can boost growth. That was the claim back in 2015 but only around half of the refugees who arrived during that wave had found work five years later.
Schulte-Suedhoff compares the crisis to climate change: a slow-motion, abstract disaster that policymakers have seen coming for years. And as with global warming, he says the proposed solutions appear inadequate.
“No attention is being paid to this topic,” he said. “The priorities appear a bit crazy.”
The working-age population in Germany actually peaked at the end of the last century, but the country has managed to stave off demographic decline for some time thanks to the arrival of millions of immigrants and the rising number of women going to work. But both trends are now fading just as the post World War II baby-boomers are retiring.
That means the economy will be reliant on increasing the productivity of the workers it does have in order to drive expansion. As a consequence, overall growth is unlikely to exceed 1% for decades, according to projections from Bloomberg Economics.
The International Monetary Fund has a similarly grim outlook. “The headwinds from population aging are already there and will continue to accelerate in the coming years,” Kevin Fletcher, who headed a recent IMF mission to Germany, told journalists in May.
Germany faces a bigger demographic drag on growth than any of its western peers for the next decade, according to Bloomberg Economics. Only Japan — historically a more closed society with a lower rate of female participation and a faster aging population — is further along this trajectory than Germany.
The two main levers available to policymakers are increasing the number of workers and making the most of those who’re already there. Both may prove very difficult.Migration has been a major boon for Germany’s economy and remains the likeliest way to shift the country’s trajectory. Labor Minister Hubertus Heil has pledged that the government will “pull out all the stops” to attract skilled workers. But the wave of immigrants from central and eastern Europe is slowing as living standards in those countries catch up to Germany.
The country has seen an increase in visas for skilled workers issued in India, the Philippines and Indonesia over the past decade. Heil is traveling to Latin America with Foreign Minister Annalena Baerbock this week as part of his efforts to recruit well-qualified people.
But immigration remains a politically treacherous issue and German society is struggling to integrate a million Ukrainians who arrived last year. Local officials say that schools are at capacity and there isn’t enough housing, while support for the anti-immigration Alternative for Deutschland has surged.
Officials and executives are also trying to persuade more Germans off the sidelines.
In Italy, which is set to be the next European Union country to run into serious demographic headwinds, only 40% of working-age women are economically active, meaning there is a pool of extra labor to draw on. But Germany has already drawn down that resource. The rate of female participation has jumped by about 10 percentage points in the past 30 years, bringing it in line with the US and above the other big EU countries.
One group that Germany might have more success in tapping is people of retirement age. While it’s made substantial progress since 2000, it’s been stagnating for the last few years. Less than 9% of Germans 65 and older are working, compared with nearly 20% in the US and about one in four older Japanese people. With the retirement age gradually rising to 67 by 2030, that number should increase, but only slowly.
Schulte-Suedhoff said his firm tries to persuade longstanding employees to keep working after they reach retirement age. “Thankfully, some are willing to do it,” he said. “Otherwise the situation would be even more dire.”
Even if Germany finds it hard to increase the number of workers, whether from abroad or by getting people to hold off retirement, future growth could still be driven by increasing how much each worker produces. For years, the not-so-secret edge of Germany’s powerful economic engine was its enviable productivity, powered by thousands of high-tech engineering and auto companies, from smaller Mittelstand firms to global powerhouses like Siemens AG and Volkswagen AG.
But after growing rapidly in the decades before the global financial crisis, Germany’s labor productivity has stagnated in recent years. It’s up less than 2% since 2015, compared to 8% in the US over the same period, according to the Organisation for Economic Co-operation and Development.
One factor behind that is how badly it lags other countries in transitioning to the digital age. The European Commission’s Digital Economy and Society Index ranks Germany 13th of 27 member countries in 2022, just barely above the EU average.
The ChatGPT phenomenon has sparked a fresh spate of optimism this year that artificial intelligence and robotics could help advanced economies like Germany manage their ageing populations. But Schulte-Suedhoff doesn’t think this will be a silver bullet.
New technology may increase productivity, but you still need skilled workers to service the robots and set up the digital infrastructure, he says, and that comes back to the country’s fundamental problem.
High-tech manufacturing and engineering industries that have long been at the heart of Germany’s competitive advantage and in the past they were served by a steady flow of qualified workers by the country’s vaunted vocational schools and apprenticeship schemes. But young Germans don’t want to learn those skills any more.
Already there are around 100,000 fewer applicants than available positions after a noticeable dropoff in recent years. More and more students are choosing to go to university instead, and the pandemic raised additional roadblocks to matching companies with potential candidates.
Schulte-Suedhoff can see the economic rationale for shifting his operations to a more dynamic manufacturing location like Mexico where he could tap into a ready supply of skilled workers, but he says that’s not for him. “I’m too patriotic,” he says.
Nevertheless, he’s pessimistic about the outlook for his country without a major change to respond to the challenges of demography.
“Otherwise we just have to limit ourselves economically and accept that growth is happening elsewhere,” he says.
–With assistance from Arne Delfs and Zoe Schneeweiss.
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