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

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Gavin Newsom is as familiar as anyone with the media’s stories of earthquakes, constant wildfires, drought, homelessness, and companies fleeing California to Texas for a life free of taxes and regulations. This is nothing new. California’s governor recalls a 1994 Time Magazine cover story, noting that “a series of disasters is shaking the state to its core, forcing Californians to ponder their fate and the fading luster of that golden dream.”

And yet, “the California Dream is still alive and well,” the state’s 40th governor said in a Zoom interview a month before his potential re-election bid.

He is not wrong. California’s economy has proven relatively resilient, first during the pandemic and now during the current period of hyperinflation. So much so that the Golden State’s gross domestic product is poised to overtake Germany as the world’s fourth largest, behind the United States, China and Japan. It had already surpassed Brazil (No. 7) and France (No. 6) in 2015 and replaced the United Kingdom (No. 5) in 2017. While many of California’s current numbers won’t be released until 2023, estimates suggest the state may have already caught up with Germany, with at least one forecast putting California ahead by $72 billion given the state’s recent growth rate.

California’s trajectory is the most transparent given the widening gap between its 379 companies with a market value of at least $1 billion and the 155 publicly traded companies in Germany that meet a similar benchmark. While California’s corporate earnings and market capitalization rose 147% and 117% over the past three years, Germany has underperformed by 41% and 34%, according to data compiled by Bloomberg. Germany’s nominal GDP gap of $4.22 trillion against California’s $3.357 trillion was the smallest on record last year and is about to disappear as Europe’s largest economy barely grew in 2022 and is forecast to will decrease.

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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 California’s resilience, its leadership, its entrepreneurs, its formula for success that goes back more than half a century,” he said, highlighting the state’s “conveyor belt of talent.”

The truth is that California outperforms the US and the rest of the world in many industries. This is especially true for renewable energy, which is the fastest growing business in California and Germany. The market capitalization of California companies in the business has increased by 731% over the past three years, or 1.74 times that of their German counterparts, according to data compiled by Bloomberg. Notable examples include Fremont-based Enphase Energy Inc., a provider of solar energy and storage solutions, whose gain was 916%, more than double the 410% posted by wind farm maker PNE AG in Cuxhaven along Germany’s North Sea coast.

The dichotomy between corporate California and corporate Germany is most pronounced in their three main industries. California tech hardware, media and software sales have increased 63%, 95% and 115% over the past three years, boosting market valuations by 184%, 54% and 58%, according to data compiled by Bloomberg. In Germany, healthcare, consumer goods and industrials volumes were mixed, with gains of 43% and declines of 2% and 7% in the same periods. Market values ​​rose by a paltry 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. Companies led by Google parent Alphabet Inc., Apple Inc. and Visa Inc., revenue will rise 8% after last year’s 34% increase, turning $100 in profit of $49. They increased their employment by 10%. Led by SAP SE, Deutsche Telekom AG and Siemens AG, Germany will sell 4% more of its products in 2023, compared to 10% growth in 2021, while earning $44 in profit for every $100 in sales. Germany’s workforce shrank by an average of 2%, according to data compiled by Bloomberg. Germany, of course, has been hit hard by the war in Ukraine.

However, with only 40 million people, California’s economy punches above its weight on a global scale. Job creation is a particularly strong area, with the unemployment rate falling to 3.9% in July, the lowest since data were collected in 1976, before rising to 4.1% in August. The gap that separates the state from the US national rate of 3.5% is the smallest since August 2021, and for the first time since 2006, California’s unemployment rate has fallen below Texas (the top two states in non-farm payrolls). The state’s unemployment rate similarly beat Germany’s by nearly a percentage point, the highest since February 2020, according to data compiled by Bloomberg.

Contrary to the prevailing perception of business dysfunction and flight since the start of the Covid-19 pandemic, the San Francisco Bay Area accounts for 78% of the market capitalization of all California publicly traded companies, up from 70% five years ago. . San Francisco’s 42 publicly traded companies, whose sales are expected to grow 14% in 2023 and 2024, are now up 62% from late 2018, when London Breed became the city’s first black woman and 45th mayor. Oakland, home to the third-largest port in the state and the eighth-largest in the U.S., grew faster for the month (9.9%) than No. 1 Los Angeles (0.3%) and No. 2 Long Beach (8.7%). ) since 2015, when Libija Šaf became the 50th mayor of the city.

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“There’s a reason why people continue to do business here,” Town Hall told Bloomberg News in an interview earlier this month. “It’s because of the talent.” Breed also said she’s hearing about people moving back to the Bay Area. “A lot of the same people” who decided to “leave don’t want to stay in areas where they don’t feel the community, the culture — that’s what San Francisco has to offer.”

Schaaf, who grew up in Oakland and is finishing her second term in January, agrees. “We value innovation, but we also value diversity and equality,” she told Bloomberg News in an interview in her City Hall office earlier this month. “It’s nice to see those values ​​being rewarded economically, because California was very upset” during the Trump administration.

More from Bloomberg’s opinion:

• California’s solar power problem goes offshore: Liam Denning

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

• A European crisis is approaching. What Kind Will It Be?: Tyler Cowen

With help from Shin Pei and Keith Gerstein.

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

Matthew A. Winkler, editor-in-chief emeritus of Bloomberg News, writes about the markets.

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