German Companies Aren’t Investing Because They Have Crushing Pension Obligations

german-flag-1142225-639x426Germany has become famous for its high savings rate, which has been pointed to as a big drag on the economy of the country — and the EU in general.

But until now, no one had really delved into why. Today, Bloomberg shed some light on the probable reason:

German businesses’ compulsion to save — and, by extension their lack of willingness to invest — reflects their large pension liabilities, a challenge that traditional financial models have hitherto failed to capture, the Bank of America economists led by Evelyn Herrmann write in a report published on Tuesday.

They reckon corporate pension commitments, in addition to demographic pressures, have derailed the investment zeal of businesses in the euro area’s largest economy, leading to a rise in their savings rate, which they express as their ‘net lending’; a proxy for retained profits.

Those demographic pressures mentioned above could prove devastating in years to come:

“Demographic aging matters, too: an older employee base coincides with higher corporate savings. In other words, pension constraints and demographics may have capped capex for a while now. This suggests to us that capex prospects remain underwhelming, despite decent growth and profits and good financial conditions.”

Older Germans have been hit particularly hard by the ECB’s negative interest rate policy. Notoriously conservative, German investors are far more likely to seek fixed income investments than riskier assets like stocks. In current market conditions, they can’t earn any interest at all in the fixed income markets — in fact, they’d actually lose money year after year.

These factors are bound to help shape Germany’s economic fate and stock market returns in coming years, and perhaps turn German sentiment against the EU.

The iShares MSCI Germany Index Fund ETF (NYSE:EWG) rose $0.12 (+0.48%) to $26.40 per share in Wednesday afternoon trading. EWG has risen 4.23% year-to-date, trailing the S&P 500 index’s 7% return in the same period.


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