Demographic Change Causes Germany’s Current Account Surplus to Shrink

In the context of the current economic crisis, Germany is often accused of generating a high current account surplus at the expense of other EU states. To reduce surplus growth, Germany is thus asked to increase consumption while decreasing exports to reduce the economic imbalance between EU states. However, the German current account surplus is just a snapshot of the current economic situation. In the long run, it will continuously decrease and completely disappear around the year 2030. After that, a current account deficit is even to be expected and is likely to stabilise at approximately two per cent of the gross domestic product per year. Demographic change, the declining and ageing population in Germany, is responsible for this development. These are the findings of a study conducted by the Centre for European Economic Research (ZEW) in Mannheim in collaboration with Ulm University on behalf of the German Federal Ministry of Finance.

The study examines the impact of demographic change on savings and investments in Germany, along with the associated macroeconomic consequences. From todays perspective, ZEW researchers assume a significant decline in the population as well as a drastic change in the age structure until 2060. The proportion of elderly people in the population will increase substantially. Empirical studies of German investment-savings patterns over their life-cycle suggest that on average, retirees will use up a share of their assets gained during the period of employment. Consequently, in the coming years, Germany has to expect a significant decline of the aggregated savings ratio due to the conceivable ageing society. As the working population shrinks, capital stock should be modified. Demographic change will thus have far-reaching economic consequences, that are beyond the experience or data sets in Germany. For this reason, the ZEW study uses model simulations adapted for the German economic structure in order to determine the impact on: savings, investments, current account balance, and further macroeconomic indicators.

The changes in savings and investments will have a considerable impact on the German current account balance. Although Germany is currently being criticised for its large current account surplus, by the year 2030 it will no longer be able to generate such surpluses. Starting in 2033, annual domestic investments will be even higher than savings and foreign capital will be required to cover these investments, causing the German current account balance to slip into negative figures.

This qualitative development of the overall trend remains stable even in different model simulation scenarios with different parameter settings. Only slight quantitative changes can be detected if, for instance, assumptions concerning birth rates or immigration are adjusted upwards. A stronger quantitative effect can be observed in association with changing assumptions regarding to life expectancy. The strongest reactions result from modifying macroeconomic key parameters such as interest and depreciation rates. Still the overall trend towards a negative German current account balance remains unchanged.

A summary of the study will be published in the German Federal Ministry of Finance’s Monthly Report for September.

For further information please contact

Dr. Marcus Kappler, Phone +49 621/1235-157, E-mail kappler@zew.de