|Dr. Thomas Mayer has been Chief Economist of Deutsche Bank Group and Head of Deutsche Bank Research since 2009. Deutsche Bank is Germany's biggest bank. |
The Eurozone medium-term annual trend growth is
set to fall to about 1-1.5% according to Dr. Thomas Meyer, Chief Economist of
Deutsche Bank Group and Head of Deutsche Bank Research. In an interview with DBR
staff economists, Eric Heymann and Jochen Möbert, Dr. Mayer said
government spending and cheap credit will be out of the picture as growth
drivers for the medium term.
Mr Mayer, we’ve been seeing a growing number of positive
reports on economic growth in Germany lately. How do you currently assess
Germany’s growth prospects for 2010 and 2011?
In our World Outlook of December 2009 we forecast 2.1% growth
for Germany in 2010 and 1.4% in 2011. At the time we were considered to be
hopeless optimists. In the meantime, most other economic researchers have
brought their forecast for 2010 into line with ours. Some of them have a higher
projection for 2011 than we do. It really looks like Germany will be the euro
area’s growth engine this year and that German growth will considerably outstrip
the expected Eurozone average of 1% again next year.
What are the main factors driving this development?
As has often been the case, the recovery in Germany is being
driven by exporting industry, but this is also helping to boost investment
activity. The surprisingly good development in the labour market is helping
Without this positive influence there probably would have been a
sharper decline in private consumption after the car scrappage bonus expired.
So the upswing was mainly export-driven at first. Is this
going to continue or will the German economy also gather strength on the back of
domestic demand in the coming months?
Unfortunately, it looks like exports will have to keep things
going for the time being. This year, net exports are set to generate 1.5 pp of
the 2% growth. Next year, our forecast sees net exports accounting for 1.2 pp of
1.5% growth. So 75% of this year’s growth will come from net exports, and even
80% of next year's, according to our forecast.
You already mentioned the German labour market as being one
of the key factors for domestic demand. It has remained astonishingly stable
considering the depth of the recession. Can you name the reasons for this, and
what are the short and medium-term prospects for German labour?
The German government’s short-time work scheme has undoubtedly
played a part in the unexpectedly good development of the labour market. Another
very important factor, though, is that companies did not assume – the way they
used to – that they could quickly find highly skilled employees again if they
laid off part of their core staff during the downswing. Over the past few years,
the shift in demographics has thinned out the supply of promising new entrants
to the labour market. So the outlook for qualified workers is really good also
on the medium to long term horizon. By contrast, people with poor skills will
have little chance of getting a job.
Well, do you see any way for domestic demand, rather than
exports, to play a sustainably bigger role in driving Germany’s labour market
and economy over the medium to long term? Or to put it another way: what
consequences will there be for the stability of the Eurosystem if Germany
continues to maintain a current-account surplus at the expense of the other euro
Germany is a world leader in industry and in an international
comparison it has one of the strongest export sectors. This is in stark contrast
to the services sector, which is pretty underdeveloped. Simple, low-skill
services are either short in supply or non-existent, while the quality of
higher-value services is often below average.
Stronger growth in this sector would help to reduce the German
economy’s export bias and help in turn to achieve more stable growth in the euro
area. To accelerate employment growth and thus incomes in the services sector
there would have to be a reform of the social security system and of regulatory
arrangements. Better possibilities for Hartz IV welfare recipients to earn a bit
of additional income or a combi-wage model could increase the number of jobs in
the low-wage sector. A reform of Germany's education system – for example,
putting an end to federal particularism and introducing tuition fees at
universities – could improve performance quality in this sector and create more
jobs for highly qualified employees. What surprises me in particular is the
amount of resistance to tuition fees for social justice reasons. Tertiary
education is an investment that promises a high return in the shape of an
above-average income if completed successfully. Why should the taxpayer shoulder
the entire investment costs in this area and thus further subsidise the minority
of the population that is already privileged thanks to its higher educability?
Let’s take a look abroad. Greece and other countries of
Southern Europe are having massive problems with their public finances. How can
these countries in particular and European countries in general manage to run
down their debt without running their economy into the ground at the same time?
All things considered, the first ten years of Europe's monetary
union were pretty successful, but one thing went wrong: access to credit was
unexpectedly easy, tempting some countries to indulge in living beyond their
They allowed their budget deficits to get excessively high and
piled up debt. If EMU is to carry on, these deficits and debts will have to be
cut back to a sustainable level. This will be a painful process and linked with
income losses, but there is no alternative. At best, the stronger economies can
help the others to adjust. Quite a while ago I suggested that the answer could
be to establish a European Monetary Fund that could administer this aid and, in
a pinch, also wind up state insolvency proceedings in an orderly manner.
Naturally, the policymakers did not react in good time, so it took a
fly-by-night rescue package to shore up the euro including, among other things,
purchases by the ECB of otherwise unsellable government bonds. We now need to
install these hastily resolved measures in a proper regulatory framework. If we
fail to do so, EMU faces a dismal future.
What consequences do you expect for economic growth after
2011 from the austerity packages that have been announced in many countries of
The austerity programmes will have their biggest impact this
year, and while they will have to be continued going forward, they will become
less painful over time. Government spending and cheap credit will be out of the
picture as growth drivers for the medium term. Therefore, trend growth in the
Eurozone is set to decline significantly, to about 1-1.5%.
And outside Europe, how are things in the US economy, for
In the past few quarters there was a strong recovery from the
2008/09 slump, so I expect there will be a soft patch in the coming quarters
with GDP growth possibly easing to about 2%. During 2011, US growth ought to
pick up slightly because of an upswing in the inventory cycle and in
expenditures on consumer durables, which had been cut back to the bone.
China seems to have emerged unscathed from the deepest global
recession of the past few decades. Are double-digit growth rates to be expected
in China in the years ahead too, or are asset bubbles already developing that
could burst in the near future?
We have already seen a decline in equity prices, and the real
estate markets are also softening. This comes as a reaction to the measures
taken by the Chinese government to cool economic activity. I expect that Chinese
growth will settle in at around 9% and that a sweeping crash in the equity and
real estate markets can be avoided.
Some analysts already say that the Western world is facing a
changing of the guard. How do you rate the overall opportunities and risks of
the developed markets in comparison with the emerging markets?
The emerging markets were in fact already the growth driver for
the global economy over the past decade, and nothing is going to change in this
respect in the current decade either. At present, the total GDP of the emerging
markets accounts for slightly less than half of global GDP. By the end of this
decade, the emerging markets will generate the larger part of global GDP. And
another thing: they will have a younger population and be carrying less debt.
How do you recommend that Deutsche Bank clients position
themselves to react to the changes in the economic environment?
As we’ve seen lately, people should be cautious about investing
in sovereign bonds issued by developed countries that have amassed excessive
debt. In the years ahead, emerging-market bonds are likely to perform better.
The past ten years were not exactly encouraging for equity investors.
Nevertheless, I think that the robust growth of the emerging markets will buoy
the shares of companies that can capitalise on this growth. These companies
don’t necessarily have to be based in the emerging markets themselves. A whole
raft of companies in the industrial countries, and in Germany in particular,
benefit from the booming growth in the emerging markets.
What's more, I believe that demand for commodities is going to
stay high. So clients should hold investments from this asset class in their
portfolios, too. Finally, I expect gold to gain further significance as an
alternative to the leading international currencies, these being the US dollar
and the euro. Investors are quite understandably worried about a long-term
increase in inflation and about the coherence of EMU. This will, in my opinion,
support demand for the world’s oldest currency.