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


Gavin Newsom is as familiar as anyone with the media narrative of earthquakes, persistent wildfires, droughts, homelessness and businesses fleeing California to Texas for a tax- and regulation-free lifestyle. This is nothing new. California’s governor recalls a 1994 Time magazine cover story that cited “a series of disasters shakes the state to its core, forcing Californians to ponder their fate and the fading luster of their 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 likely re-election.

He is not wrong. California’s economy has proven relatively resilient, first during the pandemic and now during the current period of high inflation. So much so, that the Golden State’s gross domestic product is on pace to surpass Germany’s as the world’s fourth largest after the US, China and Japan. It had already surpassed Brazil (No. 7) and France (No. 6) in 2015 and supplanted the United Kingdom (No. 5) in 2017. While many of California’s current numbers won’t be released until 2023, estimates suggest that the state could have already caught Germany, with at least one forecast implying that California is ahead by $72 billion if the state’s recent growth rate is taken into account.

California’s track record is most transparent in the growing divergence between its 379 companies with a market value of at least $1 billion and the 155 German-based publicly traded companies that meet a similar benchmark. While California companies’ revenue and market capitalization rose 147% and 117% over the past three years, Germany posted lower gains of 41% and 34%, according to data compiled by Bloomberg. Germany’s $4.22 trillion nominal GDP margin over California’s $3.357 trillion last year was the smallest on record and is about to disappear, with the larger economy of Europe barely growing in 2022 and projected to decline in 2023.

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

The truth is that California outperforms the US and the rest of the world in many industries. This is especially relevant with renewable energy, the fastest growing business in California and Germany. The market capitalization of California companies in this business rose 731% over the past three years, or 1.74 times more than their German counterparts, according to data compiled by Bloomberg. Notable examples include Freemont-based Enphase Energy Inc., a provider of solar and storage solutions, up 916%, or more than double the 410% returned by Cuxhaven-based wind farm maker PNE AG over of the German coast of the North Sea.

The dichotomy between California firms and German firms is most pronounced in their three main industries. California tech hardware, media and software sales rose 63%, 95% and 115% over the past three years, boosting market valuations by 184%, 54% and 58%, data show data compiled by Bloomberg. In Germany, healthcare, consumer discretionary and industrial products were uneven with increases of 43% and declines of 2% and 7% over the same periods. Market values ​​rose a paltry 40%, 8% and 10%.

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

Still, with just 40 million people, California’s economy is punching above its weight on the world stage. Job creation is a particularly strong area, with unemployment falling to 3.9% in July, the lowest since data were collected in 1976, before rising to 4.1% in in August The gap separating the state from the US national rate of 3.5% is the narrowest since August 2021, and for the first time since 2006, unemployment in California fell below Texas ( the two largest states for nonfarm payrolls). Similarly, the state’s unemployment rate outpaced Germany by almost a percentage point, the highest since February 2020, data compiled by Bloomberg show.

Contrary to the prevailing perception of business dysfunction and an exodus of people since the start of the Covid-19 pandemic, the San Francisco Bay Area accounts for 78% of the market capitalization of all publicly traded companies in California, 70% more than five years ago. . San Francisco’s 42 listed companies, which forecasts suggest sales will grow 14% in 2023 and 2024, are 62% more numerous today than at the end of 2018 when London Breed became the first black woman and 45th mayoress of the city Oakland, home to the state’s third-largest port and the U.S.’s eighth-largest, has grown 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 city’s 50th mayor.

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“There’s a reason people are still doing business here,” Breed said in a City Hall interview with Bloomberg News earlier this month. “It’s because of the talent.” Breed also said he has heard of people moving 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 like there’s a community, a culture, that’s what San Francisco brings to the table.”

Schaaf, who grew up in Oakland and completes his second term in January, agrees. “We value innovation, but we also value diversity and equity,” he told Bloomberg News in an interview at City Hall office earlier this month. “It’s nice to see those values ​​being rewarded financially because California was so criticized” during the Trump administration.

More from Bloomberg Opinion:

• California’s solar problem gets an offshore wind solution: 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 opinion of the editorial board or Bloomberg LP and its owners.

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

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