For 2008 we are forecasting real economic growth of 2.4 %. In nominal terms we expect gross value added in Germany to rise by just under 4 %. Stripping out employee compensation (up markedly on recent years), amortization and production levies (plus subsidies), we arrive at an increase in overall operating profits of 4.2 % (2007: + 6.8 %) on the basis of our economic forecast. Of course, this figure does not shed direct light on the performance of the DAX companies as these generate a large portion of their earnings abroad.
No grounds for earnings pessimism
After a string of years in which profits have risen faster than labor income, our estimates for 2008 show a fairly balanced trend. As a result the wage ratio – the share of employee compensation in national income – is unlikely to decline further in 2008. In the year 2000 the wage ratio had stood at 72.2 %. Since then, with the labor market weak, it has fallen steadily to 64.7 % in 2007. According to our estimates it could rise again slightly in 2008 for the first time in eight years to 64.9 %.
A comparison of Germany with the euro area and the USA shows that the earnings ratio adjusted for self-employed earnings has been at more or less the same level in all three regions of late. Measured against the seventies and eighties the increase in the euro area has been particularly striking, but Germany has also seen a pronounced rise. This means that in terms of (functional) income distribution there has been a remarkable alignment in the two largest economic blocs.
Similar trends are also evident in the return on real capital – measured as operating profits in relation to the capital stock. The USA’s long-standing lead over Germany on this profitability score has now almost evaporated. This is also further evidence that, with regard to the earnings strength of the corporate sector, Germany has made up considerable ground.
The significant improvement in the earnings picture of German companies raises hopes that the investment upswing of recent years will continue notwithstanding the current adverse backdrop. Net investment in terms of overall disposable income (2006: 3.9 %) is still way below the levels seen in the early nineties (around 12 %) and is also lower than in the late nineties/beginning of this decade (around 8 %). If the earnings picture remains rosy, the investment ratio should climb back towards earlier levels.