Success model of the German economy put to the test

In the past, the German economy has benefited greatly from globalisation. In many of Germany's industries, more than half of the turnover is generated abroad, and the majority of jobs depend on exports. But the heyday of globalisation is over. In a study commissioned by KfW, Prognos developed three scenarios that depict the range of future globalisation dynamics and worked out proposals for new growth strategies for German companies.

Status today: Germany's economy is strongly globalised

Germany has made intensive use of the opportunities associated with globalisation in the past. Companies have developed products that are in high demand and competitive on the world market. This success can also be quantified: Due to globalisation, the real gross domestic product per inhabitant was almost 1,400 euros higher on average between 1990 and 2018 than it would have been if globalisation had stagnated at the 1990 level. The German economy is thus one of the biggest winners of globalisation worldwide.

The heyday of globalisation is over

However, the phase of dynamic globalisation of the world economy is over for the foreseeable future. Uncertainties due to geopolitical conflicts, more frequent trade conflicts or events such as Brexit are dampening the development of global trade. In 2020, the Covid 19 pandemic abruptly and massively disrupted global supply and value chains. The consequences are likely to remain noticeable in the coming years.

Three future scenarios with different growth forecasts

Prognos developed three scenarios of possible developments in globalisation up to 2030 to assess their impact on the economy. In the reference scenario, which seems the most likely, it is assumed that globalisation will stagnate. In the deglobalisation scenario, the globalisation that took place in the early 2000s is partially reversed. In the globalisation surge scenario, on the other hand, globalisation picks up again in the coming years.
To make the economic effects of the different globalisation dynamics measurable, the three scenarios were transferred and operationalised in the macroeconomic forecast model VIEW. In the deglobalisation scenario, the average annual growth rate between 2018 and 2030 is 0.2 percentage points lower than in the reference scenario. A higher globalisation dynamic - as assumed in the third scenario - would, on the other hand, drive German economic growth up by 0.2 percentage points annually on average.

The German economy must adapt its current model of success

Countries and companies worldwide will probably have to adjust to a world economy without significant globalisation dynamics in the coming years. This is especially true for Germany with its strongly export-oriented economy. Foreign business is likely to be more difficult in the coming years than in the past. German companies can only grow if they find new growth strategies.

Adapting the German success model to future developments

To tap future growth potential, it might be worthwhile for many companies to take a closer look at the domestic market. For example, the shortage of labour as a result of demographic change will lead to an increase in real wages and consequently to higher private consumer spending in the coming years. Demographic change will increase demand, especially in the tourism and health sectors, as well as for products for the older generation. New digital products and services, as well as environmentally friendly products, promise further growth potential. Digitalisation will also be a growth driver in the business customer sector.
"In some market segments, however, exports still offer potential," says Prognos project manager Johann Weiß. "Here, too, the digital transformation is one of the key drivers of future import demand. Hybrid business models and products that combine classic industrial goods with digital services are likely to develop particularly dynamically."

Import demand could also increase in developing and emerging countries, which have not been the focus of German export trade so far. Admittedly, doing business in these countries is more difficult than in the traditional German foreign markets. Nevertheless, a successful entry into business can also be achieved there. After all, in the past foreign markets such as China or Central-Eastern Europe were also considered difficult sales regions that were finally successfully developed.

To the study (in German, Website KfW)

Authors: Jakob Ambros, Dr Michael Böhmer, Dr Georg Klose, Philipp Kreuzer, Jan Limbers, Dr Andreas Sachs, Dr Jan Trenczek, Heidrun Weinelt, Johann Weiß, Eva Willer