Sunday, July 30, 2023
Don't mention the Germans when going for faster growth
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

When, a few days ago, the International Monetary Fund released its latest growth forecasts, there was not very much to celebrate. The world economy this year and next will grow by 3 per cent, it said, which is about three-quarters of what used to be regarded as cruising speed. For the UK, it predicted weak growth, 0.4 per cent this year, 1 per cent next, which is better than mild recession, though not much better.

For many people, however, there was an important source of comfort. This year at least, we will be doing better than Germany. The Federal Republic will be in mild recession, the IMF expects, contracting by 0.3 per cent this year, while the UK will be on the right side of zero. Next year, if the forecast is right, and there is no guarantee of that, Germany will grow a little faster than the UK, which will have the weakest growth in the G7 group of major economies except for Italy, but that is for later.

For now, and the word schadenfreude (delight in others’ misfortunes) could have been invested for the purpose, many are cheered by Germany’s discomfort. There is a still a strong sense that if we are doing better than Germany we cannot be doing badly. Jeremy Hunt, though perfectly aware that there are plenty of other economies we should be comparing ourselves with, is fond of saying that the UK has grown as fast as Germany since 2010, so by implication Tory management of the economy cannot be that bad.

Our obsession with Germany has many roots. The image we have of Europe’s biggest economy is that of an all-powerful industrial machine, with which we have always struggled to compete. Even at the time of the Great Exhibition of 1851, British manufacturers were nervous about the higher quality of what Germany had to offer. For the first trade mission to China, undertaken by Lord Macartney in 1793, German engineered products were taken along, as well as British ones, in an attempt to wow the Chinese emperor.

More recent history has, of course, given added piquancy to comparisons with Germany. Younger people will regard this as quaint but there was a time when the only thing to watch on TV on a wet Sunday afternoon were black and white war films. The 1966 World Cup victory over (West) Germany has entered the mythology in a way that many other defeats have now.

But there has also been a sustained economic rivalry. When, in the 1950s and 1960s, Germany, defeated in the war, was seen to be doing economically better than Britain – this was the time of the Wirtschaftswunder or German economic miracle – the clamour grew, particularly among businesses, for the UK to join the then European Economic Community.

Even after that there was a perception that what became the European Union in the early 1990s was designed for the benefit of Germany, as was the euro, though many Germans were opposed to giving up the deutschemark. One Tory cabinet minister, Nicholas Ridley, was forced to resign more than 30 years ago for describing the EU as “a German racket”.

In growth terms, however, the EEC and EU were more of a British racket. Having been outgrown by Germany in the 1950s and 1960s, the UK turned the tables. From 1973 until the referendum in 2016, cumulative real-terms growth in the UK economy was 139 per cent, ahead of Germany’s 128 per cent.

The UK’s growth advantage increased later. From 1993, when the European Communities became the EU, until 2016, the UK economy grew by 62 per cent, notwithstanding the 2008-9 financial crisis. Germany’s growth over the same period was a much smaller 38 per cent. Many factors feature in these comparisons. The UK, as well as benefiting significantly from EEC/EU membership had the Thatcher reforms. Germany, following unification in 1990, had to absorb the much weaker East Germany economy. Germany’s economic reforms came later and did not go as far.

This tells us that matching or doing slightly better than Germany is not a particularly challenging metric for the UK. Germany in recent decades has been more of a lumbering if not slumbering giant than a growth machine. If we are looking for faster UK growth, Germany is the wrong country for comparison.

Why is Germany struggling at the moment even more than most of its EU partners? Before the Russian invasion of Ukraine, it was highly dependent on Russian gas, reflecting political and commercial decisions in the past which now look misguided. High inflation, currently running at 6.4 per cent and, as in this country not falling as fast as the authorities would like, probably has a bigger effect on the German psyche than in many other countries.

Most of all, however, industry, the traditional driver of the Germany economy, has been struggling. Manufacturing represents just under a fifth of German gross domestic product, tice as much as the UK. But, for many reasons, some of which date back to the “dieselgate” scandal of the mid-2010s, which undermined confidence in Volkswagen and other German motor manufacturers, German industry has underperformed in recent years. More generally, as one of the world’s top three exporters (after China and America), Germany has been held back by the slower growth in world trade since the global financial crisis. The eurozone crisis did not help.

The result is that German industrial production has barely increased over the past 10 years, and in May was only 2.4 per cent higher than in May 2013. Industry is often the poor relation of the UK economy, wrongly in my view, but it did better than that, growing by just over 15 per cent over the same period.

Even if Germany is not a good growth comparator for the UK, there are things that we can learn from them. While Britain runs a chronic trade deficit in goods, which swelled to an astonishing £253 billion last year under the impact of high-priced energy imports and has not run a trade surplus on manufactures since the early 1980s, Germany has had a trade surplus every year since 1953. Last year the surplus with the UK was more than £37 billion.

Germany has also done a better job controlling government debt. Figures from the IMF show that gross government debt in Germany is 67.2 per cent of GDP and has fallen from a peak of 82 per cent in 2010. For the UK, in contrast, the same debt measure has risen from 74 per cent of GDP in 2010 to 106 per cent now.

There are also lessons in the other direction. One cabinet minister said to me recently that, after complimenting his German counterpart on the quality of his country’s technical education, was told that they wished they had Britain’s world-class universities.

In some of the sectors that have driven growth in recent times and may drive it in future, including financial services, fintech and artificial intelligence, the UK is developing a comparative advantage over Germany. We love to compete with Germany, but maybe we are more complementary than we like to admit.