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S&P: Weak German investment knocks 4.2% off potential 2018 GDP

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S&P: Weak German investment knocks 4.2% off potential 2018 GDP

Weak business investment has prevented the German economy from growing as much as it could have in 2018, S&P Global Ratings wrote Sept. 18, adding that the ongoing global economic slowdown may hold the country back for a long time.

Since the 2008 financial crisis, German business investment has not performed as well as manufacturing and export sectors, according to the report. Public, private and housing investment in Germany has increased at an annual average of 2.9% over the last five years, lower in comparison with other eurozone's economies.

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S&P Global Ratings estimated the loss in potential output at €124 billion by the end of 2018, representing 4.2% of 2018 GDP. That could have been avoided had investment risen at the same pace as before the financial crisis. A higher tax rate in Germany than other eurozone countries may be behind weak business investment, among other reasons.

Over the last two decades, investment has not been adequate to replace depreciated capital, S&P Global Ratings wrote, adding that renewal of production facilities in Germany lagged those of other major eurozone economies.

Meanwhile, the country's capital to labor ratio has remained flat since the financial crisis — compared to rises in France and Spain.

Additionally, as German investment is driven by external demand, there would be a long-lasting impact on the German economy due to the slowing global growth or in case of a global recession, said Marion Amiot, S&P Global Ratings' senior economist, and Sarah Limbach, S&P Global Ratings' economist.

"As we can currently see, although being widely praised after the eurozone crisis, the German 'export-driven' model also has its limits."