Germany's current account surplus: Structural or cyclical?

A little discussed aspect of the recurring discussion about Germany's current account balance is the distinction between its structural versus cyclical nature, and the implications thereof. On one hand, the case for reigning in the current account surplus may not be given if it is driven by certain structural factors, such as demographics. On the other hand, it would be a grave policy mistake if structural measures were taken to moderate a cyclical current account surplus. As with policies that attempt to influence the cycle in general, applying the right dose at the right time is tricky, and has often proven ineffective.

How can the structural component of the current account be measured? Common structural determinants, i.e. factors that move slowly over time and are mostly out of the perimeter of policymakers, include:

• Demographics. The economic lifecycle theory suggests that savings are built during the working age, and consumed at retirement (and, indirectly, also when young). German demographics exhibit a particular drop in youth dependency, while the ratio of pensioners rises more significantly only after 2020 (a constellation coined as "demografisches Zwischenhoch", demographic interim high, here), suggesting that this structural factor can justify a higher current account balance for the accumulation of (foreign) savings.

• Past surpluses. Past surpluses have lead to the acquisition of sizable foreign assets. The investment return of those savings abroad contributes towards the current account surplus, and is thus largely irrelevant to the current discussion.

• Low productivity growth. Productivity growth is often linked to capital intensity of production, which is already high in Germany compared to the rest of the world, thus providing a structural explanation for "downhill" capital flows from Germany to other countries, the flip side of Germany's current account surplus.

• Oil dependency. Oil imports, while itself having a strong cyclical component, are per se a structural factor. While playing a much greater role for the current account of the United States, it is also sizable for Germany.

A paper by OECD and IMF authors provides rough estimates of these factors. While their estimation specification could be debated, results suggest that a 2 percent current account surplus could be explained by structural factors, yet recent surpluses exceed even upper estimation bands (Figure). Tweaking this structural export bias requires structural policies. Family policies and migration comes to mind with regard to demographics, as well as energy policy. In these fields, other political considerations likely outweigh this nerdy economic rationale.

Assuming the estimations are to the point, one could therefore argue that the large German current account surplus is mostly cyclical, and therefore temporary. For instance, low oil prices are keeping import values at bay and contribute to the surplus at this moment, but may bounce back as soon as global growth picks up.

Countercylical policies are always tricky, and sometimes even dangerous. If, however, policymakers decide that German or European interests justify an attempt to influence the current account cycle, it is important that measures are tailored to address cyclical effects, and thus can be phased out once the current account starts turning the other way.