Future-proofing the economy…Can we learn from the Germans?

Published on July 10th, 2013 by Andrew McBay.

I can categorically say ‘YES’ – I am married to one after all! But forget my wife’s superior intellect, no-nonsense demeanor and strong good looks! What about financially? What have the Germans done so well that we Australians can learn from when it comes to addressing the problems our economy is facing? Is it simply that they employ the hard work and discipline they’re so well known for?

My years spent living and working in Germany, fundamentally changed the way I viewed debt
Andrew McBay       

Let’s start by looking at the current situation here. Consumer spending has slowed down since 2005 and productivity levels have weakened. Consequently, the Reserve Bank of Australia (RBA) has been disinclined to cut rates. The hope being that households will save more and businesses will start improving productivity growth.

The road to economic health

The RBA feels that to improve profits, Aussie companies will have to get used to the strong AUD and improve productivity. Combined with slower wages growth, this should also reduce non-trades goods inflation.

But going through this process won’t be pain free. It’ll involve some unpopular policy changes and, we have to wonder, what exactly will the Australian economy look like after all this pain? Lucky for us, Germany has already run the gauntlet, so we can learn from its example…

The German economy took a pummeling between 2000 and 2003… Growth and exports stalled, the budget deficit widened, unemployment increased, and the Euro rose ridiculously fast against the USD (partly caused by the US’s rates being significantly lower than the European Central Bank’s).

No pain, no gain

The German government swung into action by proposing tax cuts and aggressive changes to labour and welfare laws (big policy changes!).
And, as a result, things did get worse for a while. Growth and investment decreased and unemployment rose again. BUT a year later signs of improvement began and by 2008 Germany was once again a driving force in the European economy.

Things aren’t going to be easy for many firms when it comes to cutting costs and improving efficiency       

So the obvious moral to this tale is ‘no pain, no gain’ right? Well yes, but it’s fair to say that the pain will be hit some Australians harder than others.

Things aren’t going to be easy for many firms when it comes to cutting costs and improving efficiency. The RBA will have to be prepared to cut rates to prevent growth from falling too far but will you and/or your business be able to weather the storm?

If you have a good grasp on the broader economy, you can make better day-to-day decisions. And we strongly believe in educating our clients to be able to do this.

Find out how to secure your financial future with The Money Room

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