In spite of Trump, #Qatar investments highlight Germany’s resilience

| September 11, 2018

When the head of a prominent German industry body opined last month that there was a “thunderstorm coming from the west”,  he encapsulated the trepidation spreading across Europe over Donald Trump and the seemingly reckless bullishness of his international trade policy. This stance seemed particularly threatening for Germany and its automotive industry, which sells around 1.3 million cars to the U.S. every year.

 

It’s easy to see why Trump, who has built his political strategy on aggressive atavism, would fancy a kick at Germany. The American automotive industry has been declining for several months, and with EU’s tariffs on U.S. cars significantly higher than America’s reciprocal duty, scapegoating foreign rivals plays well with Trump’s base.

 

So far, however, the threats have had relatively little impact. A new report suggests that morale is up in the German business community after a trans-Atlantic truce orchestrated by European Commission president Jean-Claude Juncker on July 25th. Those sentiments may have been buoyed still further by recent economic developments, including a Qatari announcement of €10 billion in new investment focused on Germany’s small and medium-sized enterprises (SMEs) – otherwise known as the Mittelstand.

 

So how much damage did all this tension do to Europe’s largest economy? In fact, the fallout has been relatively minor. Factory orders slowed unexpectedly in the immediate aftermath of the Trump tweet officially threatening tariffs, but GDP growth has remained steady at around 0.5%. The business confidence index from Germany’s highly respected Ifo research institution slipped in July, but has since recorded its strongest monthly improvement since 2014. A string of thinktanks, including Ifo itself, have raised their growth forecasts, while the Purchasing Managers’ Index, which gauges the health of the manufacturing industry, reached a six-month high last week.

 

In the words of Juncker himself, though, the EU’s settlement with Trump is only a “ceasefire” – and it is anyone’s guess whether economic relations between Europe and the United States will regain their stability anytime soon.

 

Will the German economy be able to withstand a more serious breakdown? It certainly seems better prepared to do so, thanks to recent rebalancing. Political stability and record-high employment drove consumer confidence levels to all-time highs last year. This trend has been reflected in household spending, which has risen by €20 billion in just three years. That spending has in turn fuelled record growth in the service sector, which now accounts for over two-thirds of German GDP.

 

The services growth has significantly reduced Germany’s reliance on traditional manufacturing. The buoyancy of the domestic market also provides a consumer-led bulwark against future shocks, strengthened by a new pay deal affecting two million public sector workers. As these changes continue, Germany’s attractiveness to foreign investors remains undiminished.

 

Just this past week, for example, German Chancellor Angela Merkel welcomed Qatar’s emir Sheikh Tamim bin Hamad al-Thani to Berlin for the Qatar-Germany Business and Investment Forum. The event might normally have flown under the radar – except that the Qatari emir used the occasion to announce €10 billion of new investment in the German energy sector and Germany’s influential Mittelstand.

 

Given that much of Qatar’s existing investments in Germany consist of shares in major firms such as Deutsche Bank, Volkswagen, and Siemens, the allocation of this new capital means significant diversification for Qatar’s economic presence in the country. Qatar may also be able to help Merkel on the energy front. Both she and Germany are under fire both within Europe and from Washington for their perceived overdependence on Russian gas supplies. Discussions at the forum included Qatari investment in a liquefied natural gas (LNG) terminal that would help Germany diversify its energy supply.

 

So is Germany’s reliance on the automotive sector a thing of the past? That is a premature claim, to say the least. The German car industry still accounts for nearly 15% of the country’s GDP and employs over 790,000 people, nearly 1% of the entire population. Trump’s tariffs could seriously curb production at a time when inflation is already running worryingly high and the industry is already reeling from the Volkswagen emissions scandal. They would also vindicate many people’s worst fears, putting a major dent in consumer confidence.

 

America’s protectionist rhetoric against Europe is not the only storm on the horizon. Washington’s trade war with Beijing could also have major repercussions. Industry groups have warned that German firms doing business in both China and the U.S. are already suffering trading restrictions. Closer to home, the economic crisis in Turkey spells big trouble for German banks, which are thought to have lent Ankara up to €20 billion.

 

All things considered, however, the German economy has weathered these shocks and disruptions about as well as Merkel and her advisors could have hoped. The great Atlantic Trade War of 2018 does not seem to have migrated from Twitter to the real world – for now, at the very least.

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