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Germany overtakes Japan as the world’s third largest economy

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Germany overtakes Japan as the world’s third largest economy

Need for renovation: Germany is overtaking Japan as the world‘s third largest economy. But the reasons speak for the relegation of both countries. PICTURE ALLIANCE

Now it’s official: Germany has overtaken Japan and is once again the third largest economy in the world. But behind this is not Germany’s rise, but the even deeper crisis in Japan.

This is a warning for Germany. Because Japan’s problems are also affecting this country: the population is aging, the working population is shrinking – and with it the growth potential.

A decline in the ranking of the largest economies is therefore foreseeable for both countries. Very soon they will be overtaken by a country with a young and growing population: India.

Germany has overtaken Japan in terms of economic power and is now the third largest economy in the world. But there is no real rise of Germany behind this. On the contrary, economic output in this country will have shrunk slightly in 2023. In Japan, however, the recession was even deeper. In addition, the Japanese yen performed weaker than the euro. Both effects caused Japan’s gross domestic product (GDP) to shrink to the equivalent of $4.21 trillion. According to Japanese government figures, German GDP was a comparable $4.46 trillion.

Japan is suffering from a severe aging population. It also hardly allows any immigration. This severely limits Japan’s growth opportunities. The working population is shrinking, while productivity is comparatively low. At the same time, the burden is growing due to the higher proportion of older people – for example for pensions and health and care costs.

Private consumption, which accounts for more than half of Japan’s economic output, has been declining for three quarters. Households are struggling with rising prices and falling real wages. “The fact that Germany has overtaken Japan shows that we absolutely need to press ahead with reforms and create a new phase of growth,” said Economic Revitalization Minister Yoshitaka Shindo in Tokyo.

The two largest economies in the world are the USA and China, which displaced Japan from second place just over ten years ago. Germany’s economy was also larger than China’s for a long time and was therefore already in third place. The following graphic shows the strong changes over time.

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Japanese economists such as Yoshiki Shinke from the Dai-ichi Life Research Institute expect a further decline in economic output due to falling exports. Experts also expect that the Japanese central bank will probably start raising key interest rates, which are still negative, in April in the fight against inflation. But Shinke is skeptical as to whether the country’s economy is strong enough to withstand higher interest rates.

According to experts, companies in Japan need to significantly increase their still relatively low productivity. This will hit many companies hard because wage demands will go up at the same time

For Germany, the change in the ranking of the largest economies is not a real rise, but rather a warning. Because many problems in the age and economic structure are similar. The following comparison also shows how quickly Japan’s decline took place: In 2000, Japan’s economy, as number two in the world, was two and a half times larger than Germany’s.

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The fact that Germany has overtaken Japan can be partly explained by statistical effects. On the one hand, inflation was higher in Germany than in Japan. This caused Germany’s nominal GDP to rise more strongly, even though the underlying real economic power shrank. Secondly, the yen has depreciated sharply against the dollar. This has depressed Japan’s GDP in dollar terms. But there are also deeper reasons for Japan’s decline.

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In fact, Japan’s economy has been in crisis for almost three decades, trapped in deflation, stagnation or at best mini-growth. Calculated in yen, Japan’s GDP has only grown by around ten percent between 2000 and today, while Germany’s GDP has grown by around 90 percent.

A major reason for… Japan’s plight was and is the demographic development. The number of people of working age there has been shrinking since 1995. In Germany, this process only began a few years ago and is still very moderate.

However, the decline in the number of working people in this country will accelerate rapidly in the coming years as the baby boomers retire. By 2030, five million more German citizens are expected to retire than there are young people in employment. The Japanese example is therefore also a warning for Germany.

Germany and Japan are losing growth power

Economists have also been warning for a long time that the growth potential for Germany is decreasing. According to calculations by economists Rainer Kotschy and David E. Bloom, German economic growth will be around 0.9 percent lower per year due to demographic developments alone by 2050 than would be the case if the population remained the same. The leading German economic institutes assume that the growth potential will be more than halved from the long-term average of 1.3 percent to 0.5 percent. All of this sounds like small changes, but the consequences are fatal, as hindsight shows.

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There were three recession years in Germany between 2000 and 2020, so around every sixth to seventh year was a recession year. During that time, there were also three years in which growth was less than 0.9 percent. In the future, these would also become recession years, so that about every third year would be a recession year if the future 20 years were similar to the years up to 2020.

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But in the first two decades of the century, Germany benefited enormously from globalization with strong exports and from cheap energy from Russia. That is now over, so the coming years are likely to be more difficult. In the end, there could be a recession in Germany not just every third year, but perhaps every second year, with growth practically coming to a standstill.

If inflation then declines and the value of the euro falls against the dollar, the place in the top three in the ranking of the largest economic nations could quickly be over. Perhaps there will be another exchange of places with Japan, but it is much more likely that another country will soon move in front of both: India.

The IMF estimates its economic power for this year at $3.73 trillion, around 15 percent less than Germany. But given the growth rates of the Indian economy, the subcontinent will almost certainly overtake the two old industrialized countries in the foreseeable future.

Parts of this article first appeared in „Welt“.

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