Abstract
In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.
I. The German Current Account: A Retrospective1
The build-up of Germany’s current account surplus over the last decade does not lend itself to a single-factor explanation, as both global and domestic factors, as well as policy changes led to increased savings and lower investment. All sectors contributed to the build-up of the surplus. While fiscal consolidation and higher household savings played a role, the corporate sector experienced a more pronounced shift. This note provides a retrospective on these developments and explores whether the factors contributing to the surplus are likely to be reversed going forward.
A. Background
1. Germany’s current account surplus reached €206 billion (7 ½ percent of GDP) in 2013, slightly higher than its previous peak in 2007, marking more than a decade of surpluses. Developments in all sectors’ saving–investment balance contributed to the build-up of the current account. First, the net lending/borrowing position of non-financial corporations (NFCs), which had been negative in the 1980s and 1990s, has been positive for the last decade — averaging 4 percent of GDP above its level in the 1990s. Second, the net lending position of household sector—which includes non-incorporated enterprises—also grew in this time frame (by 2 percent of GDP on average). Third, the improvement in general government net lending position also contributed to the current account surplus since 2011. The growth of current account surplus was the result of both a sharp increase in gross savings after 2002 and a long-term trend decline in investment.
Germany: Current Account and Sectoral Saving—Investment Balances
(Percent of GDP)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A001
Sources: Federal Statistical Office and IMF staff calculations.Savings and Investment in the German Economy
(Percent of GDP)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A001
Sources: Federal Statistical Office and IMF staff calculations.Germany: Measures of Household Savings
(Percent)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A001
Sources: Federal Statistical Office and IMF staff calculations.Germany: Househould Savings and Investment
(Percent of GDP)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A001
Sources: Federal Statistical Office and IMF staff calculations.B. The Evolution of Household Net Savings
2. Households’ net savings increased markedly during 2000-2007 as a result of several distinct developments. The increase in gross savings likely reflected at least in part the pension reform in early 2000s, which reduced the generosity of benefits and increased awareness of the demographic challenge. Another factor at play was the anemic growth of labor income, especially for low-skilled workers following the opening up of Central and Eastern Europe (see Para. 10-11 below). The increasing inequality and importance of entrepreneurial and investment income in disposable income shifted the income distribution to income brackets with higher savings rate, resulting in higher average savings. Meanwhile, residential investment by households declined significantly as the reunification construction boom ended, contributing to the widening of saving–investment gap. In recent years, the uptick in residential investment and the pick-up of consumption on the back of higher wage growth has resulted in a decline in the household saving rate.
Germany: Disposable Income and Consumption
(Percent change)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A001
Sources: Federal Statistical Office and IMF staff calculations.Germany: Distribution of Income
(euros)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A001
Source: Eurostat.3. Demographic challenges will have a strong bearing on household savings. Households’ financial assets almost doubled since 1995 with an increasing share held as cash and deposits or invested in pension and life insurance products, signaling a strong aging-related saving behavior. This suggests that household savings may start to decline in the near future, as the large baby-boomer cohorts reach retirement age and begin drawing down their savings to fund retirement years.
Germany: Households’ Financial Assets
(Thrillion euros)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A001
Sources: Eurostat and Haver Analytics.C. Drivers of German Corporate Sector Net Savings
While there are common global drivers for the NFCs shift to a net lender position, several German-specific factors played a role, notably the labor market reforms in the 2000s, the business tax reforms, and the globalization of German firms’ production chains. This section provides a discussion of these factors.
Some definitions
4. According to the national accounts, the net savings of the non-financial corporate sector (NFC) are defined as follows:
Corporate sector net savings = (value added + property income) − (compensation of employees + interest paid + taxes + dividends paid + domestic capital expenditure)
Corporate net savings can be used to finance the build-up of equity, the acquisition of financial assets (including cash), capital expenditure abroad (foreign direct investment), or a reduction in financial liabilities.
A bird’s eye view of key variables
5. While in France and Italy the NFC remains a net borrower, since early 2000 the corporate sector in Germany has become a net lender similar to the United States, United Kingdom, Canada, and Japan. Table 1 provides a summary of the key components of NFC net lending in G7 countries over three sub-periods: pre-2000, the 2000s up to the global financial crisis, and the post-crisis years.
Nonfinancial Corporate Sector: Change in Selected Variables
(Percent of GDP)
Mid-1990s is average of 1995 and 1996 values. Early 2000s is average of 1999, 2000, and 2001 values.
For Germany, net lending/borrowing is adjusted for the one-off government capital transfer in 1995.
Nonfinancial Corporate Sector: Change in Selected Variables
(Percent of GDP)
| Profits After Net | |||||||
|---|---|---|---|---|---|---|---|
| Value Added | Compensation of Employees | Interest and Taxes | Dividends Paid | Gross Savings | Capital Spending | Net Lending or Borrowing | |
| (A) | (B) | (C=A-B) | (D) | (E=C-D) | |||
| Early 2000 less mid-1990s1,2 | |||||||
| Canada | … | … | … | … | 1.2 | −0.4 | 1.6 |
| France | 1.4 | 0.5 | 3.6 | 1.8 | 1.7 | 1.9 | −0.1 |
| Germany | 1.9 | 0.0 | 2.1 | 2.9 | −0.8 | 1.9 | −2.6 |
| Italy | −0.2 | −0.5 | 1.3 | 1.2 | 0.1 | 1.2 | −1.1 |
| Japan | … | … | … | … | … | … | … |
| United Kingdom | 0.2 | 2.7 | −1.5 | −0.2 | −1.2 | 2.3 | −3.5 |
| United States | 0.0 | 1.9 | … | 0.0 | −0.8 | 0.8 | −1.6 |
| 2007 less early 2000s1 | |||||||
| Canada | … | … | … | … | 0.9 | 0.3 | 0.6 |
| France | 1.1 | 0.4 | 4.9 | 5.0 | −0.2 | 1.3 | −1.4 |
| Germany | 2.3 | −2.8 | 6.4 | 2.3 | 4.1 | −0.8 | 4.9 |
| Italy | −0.5 | 1.1 | −1.5 | −0.2 | −1.3 | 0.4 | −1.7 |
| Japan | … | … | … | … | 3.3 | 0.9 | 1.8 |
| United Kingdom | −3.8 | −2.9 | −0.5 | −1.7 | 1.1 | −2.7 | 3.8 |
| United States | −3.1 | −2.5 | 1.5 | 1.0 | 0.5 | −0.8 | 1.4 |
| 2012 less 2007 | |||||||
| Canada | … | … | … | … | −1.1 | 0.7 | −1.8 |
| France | −1.4 | 0.9 | −2.9 | −0.9 | −2.0 | −1.2 | −0.8 |
| Germany | −0.5 | 2.0 | −2.5 | −0.3 | −2.1 | −2.5 | 0.4 |
| Italy | −1.3 | 1.7 | −2.6 | −2.8 | 0.3 | −2.2 | 2.5 |
| Japan | … | … | … | … | 1.6 | −2.2 | 5.9 |
| United Kingdom | 0.3 | 1.8 | −0.4 | 0.7 | −1.1 | −1.5 | 0.4 |
| United States | 0.1 | −1.6 | 1.6 | −0.4 | 2.0 | −0.8 | 2.8 |
Mid-1990s is average of 1995 and 1996 values. Early 2000s is average of 1999, 2000, and 2001 values.
For Germany, net lending/borrowing is adjusted for the one-off government capital transfer in 1995.
Nonfinancial Corporate Sector: Change in Selected Variables
(Percent of GDP)
| Profits After Net | |||||||
|---|---|---|---|---|---|---|---|
| Value Added | Compensation of Employees | Interest and Taxes | Dividends Paid | Gross Savings | Capital Spending | Net Lending or Borrowing | |
| (A) | (B) | (C=A-B) | (D) | (E=C-D) | |||
| Early 2000 less mid-1990s1,2 | |||||||
| Canada | … | … | … | … | 1.2 | −0.4 | 1.6 |
| France | 1.4 | 0.5 | 3.6 | 1.8 | 1.7 | 1.9 | −0.1 |
| Germany | 1.9 | 0.0 | 2.1 | 2.9 | −0.8 | 1.9 | −2.6 |
| Italy | −0.2 | −0.5 | 1.3 | 1.2 | 0.1 | 1.2 | −1.1 |
| Japan | … | … | … | … | … | … | … |
| United Kingdom | 0.2 | 2.7 | −1.5 | −0.2 | −1.2 | 2.3 | −3.5 |
| United States | 0.0 | 1.9 | … | 0.0 | −0.8 | 0.8 | −1.6 |
| 2007 less early 2000s1 | |||||||
| Canada | … | … | … | … | 0.9 | 0.3 | 0.6 |
| France | 1.1 | 0.4 | 4.9 | 5.0 | −0.2 | 1.3 | −1.4 |
| Germany | 2.3 | −2.8 | 6.4 | 2.3 | 4.1 | −0.8 | 4.9 |
| Italy | −0.5 | 1.1 | −1.5 | −0.2 | −1.3 | 0.4 | −1.7 |
| Japan | … | … | … | … | 3.3 | 0.9 | 1.8 |
| United Kingdom | −3.8 | −2.9 | −0.5 | −1.7 | 1.1 | −2.7 | 3.8 |
| United States | −3.1 | −2.5 | 1.5 | 1.0 | 0.5 | −0.8 | 1.4 |
| 2012 less 2007 | |||||||
| Canada | … | … | … | … | −1.1 | 0.7 | −1.8 |
| France | −1.4 | 0.9 | −2.9 | −0.9 | −2.0 | −1.2 | −0.8 |
| Germany | −0.5 | 2.0 | −2.5 | −0.3 | −2.1 | −2.5 | 0.4 |
| Italy | −1.3 | 1.7 | −2.6 | −2.8 | 0.3 | −2.2 | 2.5 |
| Japan | … | … | … | … | 1.6 | −2.2 | 5.9 |
| United Kingdom | 0.3 | 1.8 | −0.4 | 0.7 | −1.1 | −1.5 | 0.4 |
| United States | 0.1 | −1.6 | 1.6 | −0.4 | 2.0 | −0.8 | 2.8 |
Mid-1990s is average of 1995 and 1996 values. Early 2000s is average of 1999, 2000, and 2001 values.
For Germany, net lending/borrowing is adjusted for the one-off government capital transfer in 1995.
6. In the 1990s the increase in German corporate profits went to finance dividend distributions and higher investment, so the corporate sector reduced its contribution to aggregate net savings (i.e., the current account surplus), as in most of the other G7 countries. 2 In contrast, in the first part of the following decade NFC net savings increased in most G7 countries, with Germany experiencing the sharpest increase, contributing to pushing up the current account surplus to 7.4 percent of GDP in 2007. A closer look at the components of profitability reveals that both an increase in gross value added as well as a decline in compensation of employees played a role in Germany. The decline in labor compensation as a share of GDP happened in the U.S. and U.K. as well, but in Germany it took place despite a strong increase in corporate value-added relative to GDP. Moreover, in this period German firms retained profits to a larger degree than their counterparts in the U.S. or France. To summarize, in Germany during 2000-2007 the decline in labor compensation boosted corporate profits; profits were retained to a large extent and not distributed to shareholders; and, despite these additional retained profits, NFC investment in Germany declined relative to GDP.
7. In the post-crisis years, however, some of these trends have reverted: labor compensation has been increasing despite a decline in NFC value added, and profits have declined more than dividend payouts resulting in lower gross savings. Nonetheless, the NFC’s net savings have continued to increase because investment has fallen even further.
8. The rest of the section elaborates on the potential drivers of the patterns discussed above: the role of wage moderation, the investment decline, dividend policy, financing of foreign operations, as well as the global factors behind the rise of corporate savings.
What is behind declining labor costs?
9. Two explanations are commonly offered for the meager growth of wages in Germany during the 2000s: first, the threat of off-shoring production networks to neighboring countries (Dustmann et al., 2014), and second the far-reaching Hartz labor market reforms during 2003-2005 (Krebs and Scheffel, 2013). While it is difficult to convincingly disentangle the impact of these two factors, a look at unit labor cost developments (which reflect labor compensation growth relative to productivity growth) by sectors shows that labor cost growth was meager both in the internationally exposed manufacturing sector and in the non-traded wholesale, retail, hospitality, and transport sector, although other non-traded sectors such as construction and professional services exhibited stronger wage dynamics. This suggests that both labor market reforms and foreign competitive pressures likely played a role in bringing about wage moderation.3
Germany: Unit Labor Costs by Sector
(1996 Q4=100, compensation per unit of GDP)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A001
Sources: Deutsche Bundesbank; Haver Analytics.10. In the last two years, wages have been growing more in line with productivity, as reflected in lower profitability and lower net corporate savings in the NFC in the years after the crisis (Table 1). If this trend continues, then the current account surplus might decline in the future.
What is behind sluggish capital formation?
11. As Table 1 shows, capital spending by Germany’s NFC increased relative to GDP in the second half of the 1990s, but declined thereafter. These trends are broadly similar in other G7 countries, suggesting some common factors. One hypothesis is that this reflects a decline in the relative price of capital rather than an actual slowdown in real capital accumulation (Karabarbounis and Neiman, 2012, Cardarelli and Ueda, 2006).
Investment by Non-Financial Corporations
(Percent of value added)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A001
Sources: OECD and IMF staff calculations.12. A second factor that may have played a role is that corporations redirected investment from the domestic economy to international investment, off-shoring production and creating supply chains. German enterprises have increasingly moved part of their supply chain abroad including to Eastern Europe, in particular following the eastward expansion of European Union. The net savings of German NFCs may have been used in part to fund this process.4
13. Micro data on listed companies also provides evidence on the role of foreign operations. Cross-country firm level regressions for G7 countries and controlling for the determinants of net savings, show that German firms with foreign operations tend to save more, suggesting that the savings may reflect the desire to fund foreign affiliates. This is also the case in the U.S. but not significantly in other G7 countries (Ivanova and Raei, 2014).
Why were higher corporate savings not distributed to shareholders through dividends?
14. Increased profits and declining investment are only part of the equation. The remaining question is why the increased profits were not passed on to the household sector as dividends? This may be have been the result of the 2000 tax reform which gave more favorable tax treatment to earnings retention relative to earnings distribution (Kaserer et al., 2012). The reform was motivated in part by the desire to reduce the high leverage of German corporations and strengthen their equity base. Further changes in corporate taxation in 2008 reduced some of the preference towards retained earnings in the corporate sector, but introduce it for non-incorporated firms–a large segment of enterprises.
15. From an investor point of view, the effect has been receiving the compensation through increased capital gain in the form of higher equity values. Since households’ propensity to save out of capital gains tends to be higher than out of dividends (Baker et al., 2007), this change in corporate payout policy may have resulted in a higher total saving rate (not just in higher corporate net savings), thus pushing up the current account surplus.
Germany: Equity Ratio of Non-Financial Enterprises
(Percent)
Citation: IMF Staff Country Reports 2014, 217; 10.5089/9781498328524.002.A001
Sources: Deutsche Bundesbank Special Statistical Publications and IMF staff estimates.The global factors behind corporate savings: precautionary motives and the rising role of R&D
16. Corporate savings can also be used to build up cash holdings. A growing corporate finance literature has identified a global trend towards greater cash holdings in the corporate sector and has studied its determining factors. Several key studies (for the U.S. mainly) identify precautionary motives and the rising role of R&D as the main determinants (Almeida et al., 2004, Bates, 2009). The overarching theme is that firms reserve cash to hedge against future shortfall in cash flow and in order to avoid the opportunity costs of foregoing investment opportunities due to financing shortfalls. Over time, cash ratios have increased as firms’ cash flows have become more volatile. In addition, the rising importance of R&D activities and the difficulty to obtain external finance to fund R&D may have led firms to hold more cash.
17. These global factors (precautionary motives and the increasing role of R&D) help explain growing cash holdings in German corporations after 2000 (Ivanova and Raei, 2014).5 However, the regression residuals for Germany increase after 2000s, unlike those for other countries, suggesting the presence of German-specific missing variables which might include the tax regime change or labor market reforms discussed above.
D. Conclusions
18. Global factors as well as German specific developments boosted the current account surplus over the last decade. While there are common global drivers for the NFCs shift to a net lender position, several German-specific factors played a role, notably the labor market reforms in the 2000s, the business tax reforms, and the globalization of German firms’ production chains. The households’ saving–investment gap widened in the early 2000s as the pension reforms and growing income inequality boosted households’ savings and residential investment declined by the end of the reunification construction boom.
19. Over the medium term, some of these factors may play a diminishing role, and thus lead to some gradual rebalancing of the current account. As the proportion of retirees in the population starts to rise rapidly in the next decade, households’ savings may start to decline. In the short-term, the recent revival of housing prices linked to low interest rates is leading to an increase in residential investment, though the expected decline in the size of the population because of aging may counter this trend in the medium-term. While the general government net lending is expected to remain close to its current level (0 to 0.5 percent of GDP), stronger growth in real wages reflecting tight labor market conditions may dent profits in the NFCs and help reduce corporate savings.
References
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Prepared by Faezeh Raei (EUR).
Investment outside of Germany by German corporations is not included in the NFC investment in national accounts.
Goerg and Goerlich (2012) do not find an impact of trade competition on wages in Germany (though it finds some impact on employment).
See “The German-Central European Supply Chain Cluster Report,” IMF Country Report No. 13/263.
Following the literature (Bates, 2009), the paper regresses the cash-to-assets ratio on measures of precautionary savings (cash flow volatility), firm size, measures of investment opportunities, firm leverage, cash flow to assets, net working capital to assets, capital expenditures to assets, research and development expenditures to assets, and dividends to assets. The sample includes listed firms from G7 countries over 1991–2011.
