MNI INTERVIEW: Germany Faces 10-15Y Labour Shortfall -Wise Man

Germany’s labour shortages could persist for more than a decade, a leading government advisor told MNI, as it grapples with a demographic crisis that threatens to raise the cost of social spending and make the country less attractive to workers and companies.

Martin Werding, a member of the five-person German Council of Economic Experts, also said the GCEE would downgrade its growth projections for this year in November’s annual report, bringing its outlook in line with recent Bundesbank and Eurosystem assessments.

While he agreed with Vice Chancellor Robert Habeck’s recent remark that it could take five years to get the economy back on track, Werding said structural issues could prove no less damaging, with the coalition government making little progress in addressing expected shortfalls in both workers and their social insurance contributions.

“Our current labor shortage may continue for 15 years,” Werding said. “Our labour force will be shrinking in spite of all the immigration that we have, and then the extra costs falling on employers - in terms of the employers’ share of social insurance contributions - will go up considerably.”

Whether these extra costs will target employers or employees more heavily is still to be seen, said the professor of Social Policy and Public Finance at the Ruhr-Universitat Bochum, noting that an increase over 10 years in total social insurance contributions to 43-45% of gross income from slightly over 40% today would only further detract from Germany’s allure.

“Our attractiveness for skilled immigrants will clearly deteriorate,” he said. “Attractiveness for labour immigrants, and for investors, might really be at risk. I really do hope that we're not running into a situation where no one comes to Germany to work and even young German workers start looking for work in other European countries.”

GROWTH DOWNGRADE

Having said in March that it expected the economy to expand by 0.2% in 2023 and by 1.3% in 2024, the GCEE’s up-to-date assessment will look much closer to the -0.4% and 1.1% recently predicted by the European Commission, among others.

"We [the GCEE] are currently thinking what everyone else is saying - that growth in 2023 will be between -0.2 to -0.4% before catching up to around 1% next year. But we’re clearly very exposed to China, and that contributes acutely to this situation where we seem to lag behind everyone else," Werding said.

Yet despite the gloomy outlook, he did not agree that Germany is the sick man of Europe some commentators describe.

“Everyone's waiting for signals on the economy from the politicians. We have a debate about subsidising energy costs for energy intensive sectors - which is something that the GCEE would reject. But, nevertheless, politicians seem to be moving in that direction. So these uncertainties need to be resolved, and then we can look forward,” he said, noting that while Germany’s reliance on cheap Russian energy has been exaggerated, higher prices are more likely to prompt more efficient use of energy than large-scale relocation of industry.

REAL WAGES STABILISING

Real wages - especially in the public sector - will stabilise with this year’s autumn pay negotiations, particularly as inflation fades, bolstering domestic demand into 2024, Werding said. (See MNI INTERVIEW: German Postal Workers Key For Wage Price Spiral)

Firms will also start to absorb a greater proportion of unit labour costs, he said, lending support to Christine Lagarde’s assertion that profit margins are starting to be squeezed more generally.

Nor will the government’s decision to trim EUR30 billion from next year’s budget have much of a negative impact on growth, with substantial state expenditure still channeled through extra-budgetary vehicles.

“We don't have an unfavorable cyclical situation, it’s simply that there's no growth because the labour force is in a shortage and there's little investment. It's a structural, long-term problem,” Werding said. “There is no need for the government to spend a lot of money to accelerate growth, and the level of expenditure as a percentage of GDP is still relatively high. The fact that officially they are trying to keep the debt brake is only part of the picture.”