Remember when the Japanese seemed to be so hard-working and thrifty… leading in manufacturing prowess, taking market share from us in older industries and buying a lot of our real estate?
But just when economists were convinced that Japan would overtake the U.S. economy in the late 1980s, it suddenly fell into a 23-year coma economy.
Today economists are overrating the future of another two countries: China and Germany.
I’ve focused a lot on China in the last several months, so today let’s look at Germany…
No one would argue that the Germans aren’t hard working. They have a great apprentice system for matching young workers with the jobs and skills they need. They rank high on innovation, though not quite as high as the U.S., Sweden or Switzerland.
For their standard of living, they work fewer hours than other countries along with France and the Netherlands.
Most impressive, they’re unusually fiscally responsible in an era of endless bubbles, debt and leverage. They have high savings. And they have the lowest rate of home ownership — at 56% — for such a wealthy nation.
Spain had a 92% rate of home ownership at its peak. We had 69%. Consequently, Germany didn’t have a housing bubble to any significant degree, which means there’s not one to burst either.
The Germans also have one of the lowest total-debt ratios in the world, at 283% of GDP as of 2012. The U.S. peaked at close to 400% and Japan is currently at 650%.
German consumer debt is very low at 62% (the U.S. reached just over 100%) and corporate debt is even lower at 50%. The country’s government debt is at 82%, which is lower than our current 100% here in the U.S. But it’s only that high in Germany because it has to keep bailing out less thrifty nations in southern Europe!
And Germany’s unemployment is one of the lowest in Europe and much lower than the U.S. It’s near 5% versus the 12% average in the euro zone and the 26% in Spain. In fact, it’s the only major country in Europe to have fewer adults unemployed than at the beginning of the 2008 crisis.
A big reason for this is that Germany has not seen the wage rises present in many other euro zone countries, and it has higher productivity, so its exports are more competitive than most other European countries. It exports 35% of its GDP (although, admittedly, the euro has offered Germany an advantage by keeping its currency below fair market value, especially relative to its euro neighbors).
Germany’s biggest apparent problem is simply that it’s the largest and strongest economy in Europe and it has to foot the highest bill racked up by other European countries that lack the fiscal responsibility and competitiveness.
But there is a much bigger problem for Germany…
It’s the same one Japan faced as it moved into the 1990s…
That is: A steep demographic cliff ahead!
Look at this chart.
Germany’s Spending Wave technically peaked in late 2012, where it has plateaued briefly. It’s due to fall over the edge of the cliff next year and it’ll keep falling well into 2022 or so.
This demographic drop-off is roughly as steep as the one Japanese endured after 1996, and it is stronger than what most countries in Europe face.
Germany’s problem is that it’s the second fastest aging country in the world (after Japan). Only its trends point strongly down in the next several years, while Japan’s rebound mildly.
Germany is supposed to be the country that anchors the euro zone and holds it together. How is it going to continue in this role if it becomes Europe’s Japan of the next decade?!
And guess who follows Germany over the demographic cliff…
First the U.K…
Then Switzerland and Austria — the other bulwarks of Europe — before the rest finally follow in succession.
Anyone who thinks that Europe is not going to sink further is asleep at the wheel. The region has the worst demographic trends in the coming decade, with Germany leading the way over the edge of that cliff.
It couldn’t happen to more hard working and thrifty people, but it happened to the Japanese and it will happen to the Germans and to most of Europe.
There’s no way the second half of this decade is going to be better than the first half for Europe.
Stay cautious. Stay flexible.
P.S. I cover this issue in more detail in chapters one and two of my new book, The Demographic Cliff. Find out how to get a free copy here.
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Ahead of the Curve with Adam O’Dell
Contrarians know well that commonly-held misconceptions can be the source of investment profits. Simply catch an overwhelming majority of investors leaning too far in one direction — and pinpoint the overlooked folly in their rationale — and you have the makings of a trend reversal that can pay you handsomely.