September

    2011

      Vol. 11 - No. 3


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LETTER FROM EUROPE


 

Germany: Global Growth Engine?

BY PETER G. HALL

EDC Vice-President and Chief Economist

With all the troubles swirling around Western Europe these days, one economy stands out. By all appearances, Germany is an island of sanity in a fiscal and financial world gone mad. While growth in the rest of the world is faltering, impressive performance has lifted consensus growth for Germany to 3.7%, the envy of the G7. Does Germany have a secret antidote for what ails the world economy?

Stats from earlier this year would suggest so. First quarter GDP rocketed ahead at an annualized pace of 6.1%, the strongest three-month increase since German reunification. Exports powered the increase, but the domestic economy was also solid. This helped to vault capacity utilization back up to the pre-crisis range, and led to large reductions in joblessness that lowered the unemployment rate to an impressive 7% by mid-year. In contrast to the rest of the Eurozone, Germany’s sustained success has actually rekindled domestic inflation fears. Does the success have staying power?

Given the weak global context for recent success, one might think so. But Germany is a trading economy, highly dependent on performance elsewhere. Trade as a share of GDP is outsized in Germany. Most fully developed economies have trade-to-GDP ratios between 20% and 30%. Germany’s, on the other hand, weighs in at an impressive 87%, a rate normally reserved for small open economies. Weaker world growth has dimmed prospects for this huge chunk of Germany’s economy; to sustain trade growth, Germany would have to make massive gains in market share.

Trade growth is further complicated by Germany’s dependence on the rest of Europe. 64% of German trade is with other EU partners. The immediate need for fiscal austerity in the Zone has put the bite on near-term domestic demand, a key threat to regional demand for German exports.

More recent data suggests that a slowing is indeed underway. Germany’s PMI has slumped in the past two months, with the July figure for both manufacturing and services remaining just above the critical growth-decline marker. Industrial production slowed at mid-year, capacity utilization flattened and business sentiment soured noticeably in the second quarter. Moreover, the slowing intensified month by month, extending the weakness into the third quarter, reflecting global conditions.

Nascent weakness is not comforting, but it could be transitory. World growth is still hobbled by weather effects, disaster-related supply-chain disruptions and distortions due to localized political turmoil. If these effects dissipate in the coming months, Germany could see late-year revival. One can only hope, because there are few other expected sources of near-term growth.

Analysts are cool to the ‘snap-back’ scenario. Even if the negative supply-side effects are reversed, global commerce will no doubt be affected by the market chaos ignited by the public debt crisis sweeping the Western world. The consensus outlook sees the current moderation continuing, with Germany’s growth sliding to just about half the 2011 pace next year, at 1.9%

The bottom line? The world is in need of an economy that will lead it out of the current quagmire. Many have hailed Germany’s 2011 performance as the answer. Its growth has been an inspiration, but Germany’s economic structure suggests that the global growth engine role is someone else’s.

The views expressed here are those of the author, and not necessarily of Export Development Canada.

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