Germany: Storm clouds gathering

By Diana Farrell, Tim Shavers, Sacha Ghai, Ezra Greenberg, Piotr Kulczakowicz, Carlos Ocampo, Yoav Zeif

Demographic trends are expected to exert significant pressure on the growth of German household savings and net financial wealth accumulation, with potentially substantial implications for economic growth. German households and their government will need to take actions to halt the decrease in saving and to improve the returns that households obtain on their portfolios.

Over the next 20 years, demographic trends are expected to exert significant pressure on the growth of German household savings and net financial wealth accumulation, with potentially substantial implications for economic growth overall. MGI analysis suggests that absent dramatic changes in population trends, savings behavior, or rates of financial asset appreciation, there will be no overall growth in annual real savings flows; indeed, savings flows will begin declining in 2015. As a result, expected real growth in household net financial wealth will drop by more than one-third, from 3.8 percent over the 1991–2003 period, to 2.4 percent through 2024. This declining growth would cause German household net financial wealth to fall some 25 percent or €1.2 trillion below what it would have been had the higher 1986–2003 growth rates persisted.

Germany is about to experience an important demographic shift that will reduce the population's ability to support wealth accumulation. This change, consisting of baby boomers retiring and saving less, and a slow down in the growth rate of households, will result in a decline in the growth rate of net financial wealth, a good proxy for economic well-being. A slower rate of wealth accumulation implies a reduction in future living standards since there will be less household savings to support a fast-growing retiree population, and it will become more difficult, therefore, to support domestic investment and sustain strong economic growth.

Moreover, our work in Japan, the US and other European countries indicates that these economies are facing similar downward demographic pressures on wealth accumulation. As a result, most of these countries will also be coping with a domestic savings shortfall, potentially limiting their ability to be net exporters of capital.

To navigate smoothly through this demographic transition, Germans and their government need to halt the decrease in saving and to improve the returns that households obtain on their portfolios. These objectives will be not easy to achieve and will require sustained coordinated efforts by the public and private sector.

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