Germany’s ageing population is the key ESG risk threatening its Triple A rating, Moody’s has warned.
Europe’s largest economy is going grey at one of the fastest rates globally, the credit rating agency said in a report. Although fertility rates have picked up recently, they are still behind peers such as France and the US.
Moreover, the United Nations forecasts that Germany's old-age dependency ratio (people aged over 65 relative to those aged 15 to 64) will cross 50% by 2040. This would represent a sharp rise from 35% last year, when it was already at the highest level of any Triple A economy.
Development agency KfW has calculated the country requires net immigration of 1m working age people every year for the next 12 years to offset the domestic labour force’s decline. Moody’s judges this “difficult to achieve”, given there was only a net 330,000 increase in 2021 (including some over-65s), before a jump to 1m last year because of an increase from Ukraine.
As a result, labour supply is set to fall and public spending on social care, health and pensions to rise. “The strain on the labour market is already visible and potential growth will weaken further in the coming decade without reform, which would weigh on our Aa3 assessment of its economic strength,” Moody’s analysts, headed by Steffen Dyck, said in the report.
In the absence of policy action, Germany is on course to lag average European Union growth by 30bp a year between 2025 and 2035, according to European Commission forecasts. This would see its fiscal and debt metrics start to worsen from 2030, the agency said, and would weaken its current Aa1 fiscal strength assessment.
High health and safety
Although demographics are a highly negative credit dimension for Germany and EU peers, the country scores more highly than the rest of the EU on other social factors such as access to basic services, and health and safety.
Overall, Germany is less exposed to ESG risk than most sovereigns, including the rest of the EU and other advanced economies, Moody’s said, though it cites carbon transition and physical climate risks as additional challenges.
It said low direct exposure and high innovation capacity limited the country’s vulnerability to environmental risks. In addition, Germany has already made “headway” in adopting green technology.
Germany’s “robust” governance via strong institutions should see it develop measures to manage these pressures, the agency said, noting the country has demonstrated its ability to mitigate shocks and adapt to change previously. It assigns Germany its top score for governance, whereas it gives it neutral to low environmental and social scores.
Its E2 grade is in line with Triple A, advanced economy and EU peers. But its S2 grade lags those of Scandinavia and Australasia.
Moody’s expects future German governments to maintain the economy’s competitiveness by speeding up progress in digitalisation, as well as implementing reforms.