California Poised to Overtake Germany as World’s No. 4 Economy


Gavin Newsom is as familiar as anyone with the media narrative of earthquakes, ongoing wildfires, droughts, homelessness, and corporations fleeing California to Texas for a tax- and regulation-free lifestyle. This is nothing new. California’s governor recalled a 1994 Time magazine cover story that noted, “A string of natural disasters is shaking the state to its core, forcing Californians to confront their fate and their fading glory.” Think of it as a golden dream.

Still, the state’s 40th governor said in an interview with Zoom a month before his potential re-election bid, “The California dream is still alive and well.”

He is not wrong. California’s economy has been relatively resilient, first through the pandemic and now in the current period of high inflation. So much so that the GDP of the Golden State is overtaking Germany as the fourth largest country in the world after the United States, China and Japan. The country previously surpassed Brazil (No. 7) and France (No. 6) in 2015 and succeeded the United Kingdom (No. 5) in 2017. Although many of California’s current figures won’t be released until 2023, estimates suggest that the state may already be catching up with Germany, with at least one forecast suggesting that California will top the list given its recent growth rate. The state is $72 billion ahead.

California’s trajectory is stark in the growing divergence between its 379 companies with a market capitalization of at least $1 billion and the 155 Germany-based public companies that meet the same benchmark. While California companies’ revenue and market capitalization have risen 147 percent and 117 percent over the past three years, Germany has seen smaller gains of 41 percent and 34 percent, respectively, according to data compiled by Bloomberg. Germany’s nominal GDP margin of $4.22 trillion against California’s $3.357 trillion was the lowest on record last year and is about to disappear, while Europe’s largest economy will barely grow in 2022 and is expected to decrease in 2023.

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“All of this data continues to belie the prevailing narrative and illusion” that “California’s best days are behind us,” Newsom said. “As someone who grew up in California, I’m proud of the resilience, the leadership, the California entrepreneurs, the formula for success that goes back more than half a century,” he said.

The truth is that California is better than the US and the rest of the world in many industries. This is especially relevant in the case of renewable energy, which is the fastest growing business in California and Germany. According to data compiled by Bloomberg, the market value of California companies in the business has increased 731 percent in the past three years, or 1.74 times more than their German counterparts. Notable examples include Enphase Energy Inc. The Fremont-based provider of solar and storage solutions posted 916 percent, or more than double the 410 percent returned by wind farm developer PNE AG in Cuxhaven along Germany’s North Sea coast.

The dichotomy between California firms and large German firms is most apparent in their top three industries. Sales of California tech hardware, media and software have increased 63, 95 and 115 percent over the past three years, boosting market valuations by 184, 54 and 58 percent, data compiled by Bloomberg show. In Germany, healthcare, manufacturing and industrial products were erratic with a 43% increase and a 2% and 7% decrease over the same periods. The market value increased by a small amount of 40%, 8% and 10%.

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California’s three-to-one growth advantage is similarly reflected in the comparison of the top 10 companies. The companies, led by parent company Google, Alphabet, Apple and Visa, will see revenue rise 8% after rising 34% last year as they turn $100 in sales into $49 in profit. They increased their employment by 10%. Germany, led by SAP SE, Deutsche Telekom AG and Siemens AG, will sell 4% more products in 2023, down from 10% growth in 2021, while for every $100 in sales, It makes a profit of $44. According to data compiled by Bloomberg, Germany’s labor force has shrunk by an average of 2 percent. Germany, of course, has been deeply affected by the war in Ukraine.

However, with only 40 million people, California’s economy punches above its weight on the world stage. Job creation is one very strong area, with unemployment falling to 3.9 percent in July, the lowest level since data were collected in 1976, before rising to 4.1 percent in August. The gap separating the state from the U.S. national rate of 3.5 percent is the smallest since August 2021, and for the first time since 2006, California unemployment fell below Texas (the top two states for nonfarm payrolls). The state’s unemployment rate similarly surpassed Germany’s by nearly one percentage point, the highest since February 2020, data compiled by Bloomberg showed.

Contrary to popular belief about business inefficiencies and the exodus of people since the start of the Covid-19 pandemic, the San Francisco Bay Area accounts for 78 percent of the market capitalization of all publicly traded companies in California, up from 70 percent five years ago. . The number of San Francisco’s 42 listed companies, which are forecast to grow by 14% in 2023 and 2024, is 62% higher today than at the end of 2018, when London Breed became the city’s first black woman and 45th mayor. became. Oakland, home to the third-largest port in the state and eighth-largest in the U.S., grew at a faster monthly rate (9.9%) than No. 1 Los Angeles (0.3%) and No. 2 Long Beach (8.7%). ) since 2015 when Libby Schaaf became the 50th mayor of the city.

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“There’s a reason why people continue to do business here,” Breed said in a town hall interview with Bloomberg News earlier this month. “It’s because of the talent.” Breed also said he’s hearing from people who are returning to the Bay Area. A lot of the same people who decide to leave don’t want to stay in areas where they don’t feel like there’s a community, a culture — that’s what San Francisco brings to the table.

Schaaf, who grew up in Oakland and will finish his sophomore year in January, agrees. “We value innovation, but we also value diversity and equality,” he told Bloomberg News in an interview at his mayoral office earlier this month. “It’s nice to see these values ​​being rewarded economically because California has been so vilified under the Trump administration.”

More from Bloomberg Opinion:

• California’s solar problem solved: Liam Denning

• Downtown San Francisco can’t shake working from home: Justin Fox

• A European crisis is coming. Which type will it be?: Tyler Cowen

– With help from Shane P. and Keith Gerstein.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Matthew A. Winkler, retired editor of Bloomberg News, writes about markets.

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