Economists naturally focus on the uncertain short-term global outlook. But the medium to long term outlook is daunting given demographics, U.S.-China tensions, excess leverage, relocation, and often limited macro space. Sustainable growth rates are expected to continue to decline during this decade.

Accentuating these setbacks, the Chinese and German growth models are outdated and require an overhaul. Whether this will happen is an open question. Both account for almost a quarter of the world’s gross domestic product.

China’s growth over the past two decades has been extraordinary. Before the 2008 financial crisis, it was fueled by exports and then by large-scale credit growth.

However, the quality of growth has been affected by state-owned banks injecting excess liquidity into state-owned enterprises, real estate speculation, and inefficient local governments. The authorities are now trying to reduce vulnerabilities to high debt and financial stability. This is slowing growth and hurting a weakened housing sector – which by some estimates accounts for as much as 30% of GDP. Potential growth this decade is expected to fall to 5% or more. Some analysts argue that if only quality productive investments were financed, potential growth could be closer to 3%.

The authorities have long debated the shift of activity from investment-led growth to consumption and services. But this transition is not happening at a satisfactory pace. While China’s current account surplus – the gap between gross savings and investment – has shrunk significantly to GDP after the global crisis, very high savings continue to weigh on consumption ( graph 1).

Figure 1. China’s investment and savings as a percentage of GDP

(Source: International Monetary Fund, World Economic Outlook Database, October 2021)

In addition, investment remains high and more is needed to generate a percentage point of growth (Chart 2).

Chart 2. Chinese investment, percentage change in real GDP

(Source: International Monetary Fund, World Economic Outlook Database, October 2021)

In this context, the pursuit by the authorities of common prosperity and dual circulation is a priori quite sensible. Tackling inequalities in accordance with common prosperity means increasing the incomes of low- and middle-income workers, which would boost consumption. Stimulating domestic demand in accordance with dual circulation is essential as China has too large a global footprint, especially amid global geopolitical tensions, to rely significantly on the global economy for its livelihood.

These policies are easier said than implemented. Without significant credit expansion and given monetary restrictions, fiscal policy will need to intensify to support growth and reduce inequalities. But as macroeconomic policy eases, Chinese authorities are emphasizing stability. China’s private sector is more efficient than the public sector, but President Xi Jinping is cracking down on the former. Implementation will also require concrete plans, for example on climate, infrastructure, hukou and education reforms.

The German economy has long been export-oriented. Current account surpluses have hovered around 7% of GDP for years and the IMF expects this trend to continue. Domestic activity remains slowed down, while Germany absorbs European and foreign demand. Its export strength is evident in the rest of Europe and China. The automotive sector – for some, represents nearly 10% of the GDP and nearly a million workers – plays a special role.

Over the past two decades, Germany’s growing current account surpluses have manifested themselves in stable investments and sharply rising national savings (Chart 3).

Figure 3: German savings and total investment

(Source: International Monetary Fund, World Economic Outlook Database, October 2021)

As a result, private consumption remains quite low as a percentage of GDP for an advanced economy – around 50%. In addition, wage discipline has slowed the growth of unit labor costs, helping to maintain strong export competitiveness but hampering consumption (Chart 4).

Graph 4: Growth indicators for unit labor costs in Germany

(Source: Federal Reserve Bank of St Louis, Organization for Economic Co-operation and Development)

Global growth is, however, expected to slow over the decade. China – a key German export market – will do so in particular. European growth will remain modest. More restrictive global trading conditions and relocation in the coming years and tensions between the United States and China could further complicate the external environment facing Germany. The German auto industry is facing a difficult transition.

It is in this context that the new government takes office. Its welcome intentions to use fiscal maneuvers to bypass the “debt brake” and stimulate climate and infrastructure spending point to the prospect of increased investment and reduced public savings. This would help stimulate domestic demand and reduce external dependence.

But given the leadership of the Free Democratic Party in the Finance Ministry and innate German conservatism, the new government may ultimately be cautiously sidestepping the “debt brake”. The unions also do not demand sufficiently large wage gains that would considerably increase the share of labor in income and therefore in consumption.

Therefore, there is little reason to believe that Germany will embark on a fundamental change of course, reorienting its growth model away from dependence on expected external demand.

That said, Germany’s capacity for adjustment should not be underestimated. After reunification, Germany was considered the “sick man” of Europe. But by reducing unit labor costs in the early 2000s, coupled with the impact of the “Hartz” reforms under the SPD Schroeder government, Germany returned to its role as the dominant force in Europe. Will the new Scholz government be able to turn the tide with the climate, digitization and investment in infrastructure?

The challenges facing countries’ post-pandemic growth patterns, especially for Germany and China, deserve to be added to the long list of risks and vulnerabilities facing the global economy of the 2020s.

Mark Sobel is the US President of OMFIF.