Global Growth Engine?
PETER G. HALL
Vice-President and Chief Economist
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
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
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.
views expressed here are those of the author, and not necessarily of
Export Development Canada.