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, drought, homelessness and companies fleeing California to Texas for a tax and regulation free lifestyle. This is nothing new. The governor of California recalls a Time Magazine cover story in 1994 stating “a series of disasters is rocking the state to the core, forcing Californians to ponder their fate and the fading glow of its 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.

It’s not wrong. California’s economy has proven relatively resilient, first through the pandemic and now through the current period of high inflation. So much so, that the Golden State’s gross domestic product is about to overtake that of Germany as the fourth largest in the world after the United States, China and Japan. It had already leapfrogged Brazil (No. 7) and France (No. 6) in 2015 and replaced the UK (No. 5) in 2017. Although many of California’s current figures will not be published until 2023, estimates suggest the the state could already have caught Germany, with at least one forecast suggesting that California is ahead by $72 billion when considering the state’s recent growth rate.

California’s trajectory is most transparent in the growing difference 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 revenue and market capitalization rose 147% and 117% in the past three years, Germany managed to garner inferior gains of 41% and 34%, according to data compiled by Bloomberg. Germany’s nominal GDP margin of $4.22 trillion over California’s $3.357 trillion last year was the smallest on record and is on the verge of disappearing, with Europe’s largest economy barely growing in 2022 and forecast to shrink in 2023.

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“All of this data continues to obscure the dominant narrative and illusion” that “California’s best days are behind us,” Newsom said. “As someone who grew up in California, I feel pride in the resilience of California, its leadership, its entrepreneurs, its formula for success that goes back over half a century,” he said, highlighting “a conveyor belt for talent” of the state.

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

The dichotomy between corporate California and corporate Germany is most evident in their three main industries. California tech hardware, media and software saw sales increase by 63%, 95% and 115% in the past three years, boosting market valuations by 184%, 54% and 58%, data compiled by Bloomberg show. In Germany, healthcare, consumer discretionary and industrial products were inconsistent with increases of 43% and decreases of 2% and 7% during 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. sees revenue rise 8% following a 34% increase last year as they turn $100 of sales into $$49 of profit. Their employment increased by 10%. Germany, led by SAP SE, Deutsche Telekom AG and Siemens AG, will sell 4% more of their products in 2023, down from a 10% increase in 2021, while generating $44 in profit from every $100 of sales. Germany’s labor force fell by an average of 2%, according to data compiled by Bloomberg. Germany has, of course, been seriously affected by the war in Ukraine.

Still, with only 40 million people, California’s economy punches 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 was collected in 1976, before rising to 4.1% 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, California’s unemployment fell below Texas (the two largest states for wages not they are farms). The state’s jobless rate similarly outperformed Germany by almost a percentage point, the most since February 2020, according to data compiled by Bloomberg.

Contrary to the general perception of business dysfunction and the 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, up from 70% five years ago according to. . San Francisco’s 42 listed companies, whose forecasts suggest sales growth of 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 the 45th mayor of the city. Oakland, home to the third largest port in the state and the eighth largest in the US, 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 why people continue to do business here,” Breed said in a City Hall interview with Bloomberg News earlier this month. “It’s because of the talent.” Breed also said she is 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 like there’s a community, a culture – that’s what San Francisco offers.”

Schaaf, who grew up in Oakland and is completing her second season in January, agrees. “We value innovation but we also value diversity and equity,” he told Bloomberg News in an interview in his City Hall office earlier this month. “It’s nice to see those values ​​being rewarded economically because California was lambasted a lot” during the Trump administration.

More Bloomberg Opinion:

• California’s Solar Problem Gets Offshore Wind Fixes: Liam Denning

• Downtown San Francisco Can’t Shake Working From Home: Justin Fox

• A European Crisis Is Coming. 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 Bloomberg LP and its owners.

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

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