Two weeks ago I was in Berlin for the launch of the Anglo-German Financial Services Dialogue; I was happy to be able to contribute to the discussion by giving a context-setting presentation about the outlook for the UK and German economies.
The main theme of my presentation was that both the UK and German economies are strong and dynamic—but their strength has different sources, and therefore they face different risks. Investor confidence about the UK is predicated on its growth prospects, while investor confidence in Germany is based less on growth than on very strong macro fundamentals—though at an annual average of 1.6% in 2016-17, growth is also expected to be reasonably robust. Below are some of the headline data points and a summary of my assessment:
Growth is expected to be faster in the UK than in Germany, driven by private consumption. In Germany, growth is more balanced across almost all the components of the economy—consumption, government spending and investment.
The current-account position in both countries is becoming less extreme—though the movement is from opposite starting points. Germany runs a large merchandise trade surplus which is offset slightly by a small deficit in services trade (and financial services are a relatively small contributor to total services). In contrast, the UK’s services surplus—driven in large part by financial services—partially offsets the merchandise trade deficit.
In conclusion, I noted that the UK and German economies are standouts among their peers, but for different reasons. Both countries have strong near-term prospects, but their country-specific risks, which derive from their different economic structures, are worth monitoring. Of course, those country-specific risks are part of a broader global environment characterised by anaemic growth, distortionary monetary policy and increasing political uncertainty. In that context, it’s clear that policy credibility is going to remain a vital source of economic strength.