Deglobalisation: a stress test for the economy and investors

Corona is putting globalisation to the test – and with it Germany’s successful export-driven economic model. There are signs of a shift in the global economy. This has important implications for investors – an international approach to investment is more compelling than ever.

An article by Dr. Jörg Zeuner

Chief Economist and Head of Research & Investment Strategy

In summary:

  • Coronavirus and the US-China conflict are reducing the integration of the global economy and putting pressure on Germany’s export-driven economic model

  • Renationalisation of production requires extensive automation

  • Climate technology is one of the German economy’s beacons of hope

  • Investors should give their portfolios a more international focus in the wake of the deglobalisation of the real economy

Coronavirus is putting globalisation to the test, and with it Germany’s successful export-driven economic model. This year, global trade in goods could be up to a quarter lower than in 2019, while the Association of German Chambers of Industry and Commerce currently estimates that German exports will drop by 15 per cent. And it is by no means certain that they will quickly recover in the year ahead. The pandemic is posing more than just short-term challenges for Germany. There are signs of a fundamental shift in the global economy, as a study by Union Investment shows. The main beneficiaries of globalisation, such as Germany, have an especially long way to fall. What may come as a surprise is that a Democratic win in the US presidential elections could increase the pressure.

"Coronavirus is putting globalisation to the test, and with it Germany’s successful export-driven economic model."

Dr. Jörg Zeuner

Coronavirus is exacerbating problems that already existed beforehand. The crisis is an additional burden on German car manufacturers on top of the diesel scandal and the switch to electric vehicles. In the growth area of technology, the German economy is falling even further behind. While the dominant technology giants in the US are among the winners of the crisis, many German companies are not up to date in terms of digitalisation and automation. The same applies in comparison to China, which has been rapidly closing the technology gap in recent years.

Renationalisation of production requires more extensive automation

Automation will become even more important in a post-coronavirus world. Why? Like many other countries, Germany will learn lessons from the crisis and react accordingly. This includes improving the security of supply for essential and strategic goods, such as in the pharmaceutical or healthcare sectors, but also for technology. After all, it was difficult or even impossible to import some of these goods during lockdown. Companies will also try to prevent the collapse of supply chains in the future by shortening them and maintaining closer control over them. Consequently, the return of production to the home country (reshoring) or to nearby countries (nearshoring) will increase in the aftermath of the pandemic.

Clearly, comprehensive reshoring makes most economic sense for companies that are experiencing structural growth and are already investing to handle the growth. Germany – as well as most other European countries – is reaching its limits, in particular due to its weakness in the technology sector. What’s more, reshoring from emerging markets in Asia is only attractive for high-wage countries if they have a sufficiently high level of automation. Robots can make production in low-wage countries unnecessary, while also simplifying social distancing in the event of a pandemic, but the decisive factor is how comprehensively modern technology is combined with fully automated and digitalised processes. Companies such as the American electric car manufacturer Tesla are often way ahead of the generally rather hesitant German manufacturers. In this respect, German industrial companies and SMEs need to fundamentally readjust.

China is competitive in the deployment of automation technology

Sales of industrial robots
China is competitive in the deployment of automation technology
Sources: IFR, Macrobond, Union Investment.

With regard to trading partners and sales markets, the crisis is intensifying the conflict between the US and China, and thus increasing the risk for German companies that particularly focus on business with China. Other factors also come into play. China was able to bring the virus under control early on and is trying, as it did after the financial market crisis, to aggressively exploit the weakness of the industrialised countries. Greater control of Chinese direct investment is already on the EU’s political agenda and could worsen German-Chinese economic relations.

Climate technology a beacon of hope for the German economy

What do these developments mean for Germany in terms of economic and industrial policy? The EU will certainly become even more important. In a world with more protectionism and fewer intercontinental export opportunities, Germany has an interest in a rapid recovery of the European economy as this is its core sales market. The agreement on the reconstruction fund was the first important political signal for European cohesion. In the next stage, it is vital that the funds are used intelligently. As much of the money as possible should be invested in the development of technologies of the future. Climate technology and the 5G network, i.e. digital infrastructure, are absolutely critical in this respect.

When it comes to ‘green’ technology, Germany has a solid basis on which to build – this is one of the few sectors where there is an opportunity to take a leading role in a growing global market. The green transformation of the economy and the battle against climate change remain the key tasks for this century, despite the coronavirus crisis. This will involve, among other things, better electric motors, recycling facilities and green hydrogen. According to a study by the Mechanical Engineering Industry Association and BCG, the engineering industry could generate an additional €10 trillion globally in areas such as these by 2050.

"When it comes to climate technology, Germany is in a good position, but could very quickly lose its lead if Joe Biden wins the presidential election."

Dr. Jörg Zeuner

The cake is enormous, but how big a slice German companies will be able to get, depends in part on the outcome of the US election. The fact that Germany and Europe currently enjoy a lead over the United States when it comes to green technologies is down to a lack of interest in climate issues on the part of President Trump. However, his Democrat rival, Joe Biden, has announced his intention to carry out massive investment in sustainable infrastructure and renewable energy if he is elected. The envisaged magnitude of state investment, in the order of US$ 2.4 trillion, is many times higher than the amount of funding currently planned for green projects in Europe. What this means is that if the US puts its foot on the accelerator in terms of climate policy spending, it will very quickly overtake Europe.

Investors should take a more international approach to investment

What are the implications of all this for investors? Fundamentally, a reduced level of integration in the global economy should not prompt investors to take a less international outlook. On the contrary, the low interest rates that have now been cemented in by the coronavirus crisis and the weakness of the European technology sector make a more compelling argument than ever for an international approach to investment. The process of deglobalisation could result in greater variation in investment returns, i.e. lower correlation between regions. This, in turn, means greater benefits from diversification. The medical technology, pharmaceutical, automation and climate technology sectors are areas in which there could be German companies that benefit either directly or indirectly from deglobalisation. Caution is the watchword for any companies with a significant exposure to China and in the transport sector, especially shipping. In other words, careful selection is the key.


As at 17 August 2020