A persistent current account surplus occurs when a country consistently exports more goods, services, and capital than it imports. While this might seem beneficial, it can lead to various economic implications.
NoteA current account surplus occurs when the credits in the current account are greater than the debits.
Low Domestic Consumption and Investment
- Persistent surpluses often indicates low domestic consumption and lower standards of living because the domestic production is greater than the domestic consumption.
- The current account surplus means there is a financial account deficit.
- This could lead to a risk in insufficient domestic investment as funds are leaving the country.
- This limits the level of economic growth.
Exchange Rates - Appreciation
- The current account surplus places an upward pressure on the currency value, appreciating the currency, which causes lower exports and higher imports.
- This can lower the economic growth rate since there is a lower aggregate demand.
Low Inflation
- The reduced aggregate demand due to the current account surplus puts a downward pressure on demand-pull inflation, reducing the inflation rate.
- Moreover, the lower import prices place a downward pressure on cost-push inflation as well.
Employment
- The reduced aggregate demand can lead to high unemployment since there is low demand and hence a lower supply need and lower revenue for firms, leading to workers losing their jobs.
- At the same time, unemployment can decrease for firms who have low import costs due to the appreciation.
- Therefore, the effects are quite varied.
Reduced Export Competitiveness
- Exports become more expensive for foreigners as the currency appreciates.
- Therefore, this can cause difficulties for domestic firms to compete with foreign firms in global markets.
Germany's Persistent Current Account Surplus
Background
Germany has consistently maintained a persistent current account surplus, meaning that its exports of goods, services, and capital income have significantly exceeded its imports. In 2022, Germany's current account surplus was approximately €162 billion, accounting for about 4.25% of its GDP. This trend has positioned Germany as one of the world’s largest creditor nations. Despite fluctuations, Germany has run a current account surplus every year since 2002, reinforcing its export-driven economic model.
Domestic Consumption and Investment
A substantial portion of Germany’s economic growth has been driven by strong export performance, leading to higher corporate profits and trade surpluses. However, this export-oriented growth model has been accompanied by relatively subdued domestic consumption. German households exhibit a high savings rate, which, while contributing to capital availability, results in lower domestic demand. Private consumption as a percentage of GDP in Germany is lower than in many other advanced economies, standing at 51% in 2022, compared to 68% in the United States.
Consequently, domestic investment has not kept pace with national savings, leading to capital outflows, as excess savings are invested abroad rather than in domestic infrastructure, technology, and industries. In 2022, Germany recorded net capital outflows of approximately €260 billion, reflecting its reliance on foreign investment opportunities rather than strengthening domestic industries.
Exchange Rates
The persistent current account surplus exerts appreciation pressure on the euro, making German exports more expensive for foreign buyers. However, Germany's membership in the Eurozone means that the euro's exchange rate reflects the economic conditions of all member countries, not just Germany. This shared currency arrangement has often resulted in a weaker euro than what might be expected if Germany had its own independent currency, thereby enhancing the price competitiveness of German exports.
For instance, despite Germany’s strong trade performance, the euro depreciated from $1.22 in early 2021 to $1.06 in late 2022, making German exports relatively cheaper in international markets. This has provided an additional competitive advantage to German firms.
Inflation
Germany’s focus on exports and its high savings rate have contributed to moderate domestic inflation rates over the years. The suppressed domestic demand has limited upward pressure on prices, as lower consumption reduces aggregate demand-driven inflation.
However, the energy crisis following the Russia-Ukraine conflict led to an increase in imported inflation, particularly due to higher gas and electricity prices. In 2022, Germany’s inflation rate surged to 8.7%, the highest in decades, demonstrating that external shocks can offset the inflation-dampening effects of a current account surplus.
Employment
The export sector has been a significant driver of employment in Germany, particularly in industries such as automotive, machinery, and chemical manufacturing. Companies like Volkswagen, BMW, and Siemens employ millions of workers, reinforcing Germany’s status as a leading exporter of manufactured goods.
As a result, Germany has consistently maintained low unemployment rates, standing at 3.4% in 2022, one of the lowest among advanced economies. However, the country faces demographic challenges, with an aging workforce and declining birth rates, which could impact future labor market stability.
Export Competitiveness
Germany’s persistent current account surplus underscores its strong export competitiveness. Factors contributing to this include a highly skilled labor force, a reputation for high-quality engineering, and a focus on high-value goods such as automobiles, industrial machinery, and pharmaceuticals.
However, the reliance on exports also makes Germany vulnerable to external economic shocks, such as slowdowns in key trading partners like China and the United States. A reduction in global demand could adversely impact Germany’s GDP growth, highlighting the risks of over-reliance on exports as a growth strategy.
Questions
- Explain how Germany’s persistent current account surplus affects its domestic consumption and investment patterns.
- Discuss the role of the Eurozone’s shared currency in influencing Germany’s exchange rate and export competitiveness.
- Evaluate the potential risks associated with Germany’s reliance on an export-driven growth model.
- Analyze the impact of Germany’s current account surplus on its inflation and employment levels.
1. How can a persistent current account surplus affect a country's exchange rate?
2. Why might a surplus lead to reduced domestic consumption and investment?
3. What are the potential long-term risks of being on a current account surplus for economic growth?
Theory of KnowledgeTo what extent should governments intervene in the economy to correct balance of payments imbalances? What ethical considerations arise when one country's surplus contributes to another's deficit?
