German economy defies the crisis

Europe’s sovereign debt and banking crisis is weighing heavily on the global economy. There is growing concern that the crisis in several European economies could slow global economic growth. The International Monetary Fund has already lowered its forecasts for global economic growth for this year and the next. The World Bank’s most recent economic outlook even warned of a global recession.

The German economy has nonetheless been profiting from global demand for goods. In the first quarter of 2012, German exports to non-member countries rose by more than 11 percent. Consumer spending contributed even more than exports to the first quarter’s surprisingly high GDP growth of 0.5 percent. This was after negative growth in the fourth quarter of 2011, which had raised concerns of a potential technical recession were it to be followed by a subsequent quarter of negative growth.

The positive start to the year and continued good news from the German labour market indicate that the German economy has been managing to sidestep the economic slump in Europe and that quarter-on-quarter growth will be in positive territory for the second quarter as well. That would bring Germany a step closer to achieving GDP growth of one percent or more for the year as a whole. Yet for this to happen, the governments in the eurozone will have to succeed in containing the uncertainties and risks that have emerged as a result of the sovereign debt and banking crisis.

Global Economy

Europe slowing global
economic growth

Growth in the US, recovery in Japan,
eurozone still weak

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German Economy

German economy still
surprisingly strong

Good start to current year,
domestic demand driving growth

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Incoming Orders/Industrial Production

Orders in positive trend, production stable

Eurozone demand rising,
production still strong

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Outlook

Real economy solid, political environment anxious

One percent growth entirely realistic for 2012

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Policy Agenda

Building confidence is key to resolving the crisis

Europe urgently needs an inspiring
construction plan for the future

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Foreign Economic Report

Clear rise in exports
expected over the year

»Around 60 percent of German exports go to the European Union.«

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Global Economy

Europe slowing global economic growth

The global economy regained upward momentum at the start of 2012. According to data from the International Monetary Fund (IMF), global economic growth was 3.6 percent in the first quarter of 2012 (annualised and seasonally adjusted) – much stronger than had been expected at the start of the year. This was caused by temporary factors like the steps taken by the European Central Bank (ECB) in late 2011 and early 2012 that helped to briefly raise hopes on the financial markets. In addition, export-focused economies like Germany and the newly industrialised countries of Asia benefitted from the continued expansion of global trade. Yet despite a positive first quarter, the IMF lowered its growth forecast slightly for both the current year (down 0.1 percentage points to 3.5 percent) and the coming year (down 0.2 percentage points to 3.9 percent). The main sources of growth will continue to be the newly industrialised countries, whose GDP is set to increase by 5.6 percent in 2012 and 5.9 percent in 2013. The IMF’s projections put growth in developed economies at 1.4 percent in 2012 and 1.9 percent in 2013, assuming that the European sovereign debt crisis does not escalate and the US does not experience a large fiscal contraction.

In the United States, the economy grew by 0.5 percent in the first quarter of 2012 versus the previous quarter. That equates to an annual growth rate of 1.9 percent. Consumer spending and capital investments were the biggest contributors to growth, up 0.4 and 0.1 percent respectively. Government spending made a slightly negative contribution to growth of -0.1 percent. The unemployment rate inched up to 8.2 percent in May, but this is still much lower than one year ago. Employment growth edged up just a little, but recent data show that the average workweek has risen significantly. Given the serious instability in the global economy, US companies are presumably opting to have their current employees work longer hours instead of hiring new workers. The purchasing managers index for manufacturing and the University of Michigan’s consumer sentiment index fell slightly from April to May. But both are still higher than they were a year ago. In another sign that the US economy is coming back to life, US industrial production increased over 5 percent in both April and May. And while the IMF has slightly lowered it forecasts for US GDP growth to 2 percent for 2012 and 2.3 percent for 2013, these numbers are still significantly higher than growth forecasts for other industrialised nations.

After a weak fourth quarter in 2011 due to the floods in Thailand, the Japanese economy recovered in the first quarter of 2012. Japan’s GDP increased by 1.2 percent over the previous quarter. Consumer spending was up 0.7 percent, making it the biggest contributor to growth. Inventories and government spending contributed 0.3 and 0.2 percent respectively, while capital investments made a negative contribution of 0.2 percent. Consumer sentiment edged up again in May according to official sources in Japan. Unemployment in April was at 4.6 percent, still around the average rate for 2011. The IMF revised its growth forecast up to 2.4 percent for the current year, but it is no longer as optimistic about 2013 as it was in the spring. It is now predicting growth of 1.5 percent for 2013, 0.2 percentage points lower than its earlier estimate.

The tense situation in the labour market and fiscal consolidation measures in crisis-hit countries are weighing heavily on the eurozone economy. After falling 0.3 percent in the last quarter of 2011, eurozone GDP remained flat in the first quarter of 2012. Further declines are very likely, especially since there are still no signs of a solution to Europe’s ever-worsening sovereign debt and banking problems. Consumer and industry sentiment indicators are also in negative territory. Like the IMF, the European Commission lowered its forecast for 2012 by 0.3 percent in the springtime. Of the largest economies in Europe, only the German economy posted growth in the first quarter. France’s GDP was flat during that period, whereas Italy’s GDP shrank by 0.8 percent.

Photo: BDI/fotolia

German Economy

Domestic demand driving growth. Photo: BDI/fotolia (Thorsten Jahns)

German economy still surprisingly strong

After a weak final quarter in 2011, the German economy got off to a surprisingly good start in 2012. In the first quarter of 2012, Germany’s GDP rose 0.5 percent over the previous quarter, after seasonal and calendar adjustments. Compared to the same period one year earlier, German GDP grew by a healthy 1.7 percent. Growth in the domestic economy was bolstered mainly by consumer spending, which rose 0.4 percent from the quarter before. Government spending was also higher, up 0.2 percent from the previous quarter. Capital investment, however, slipped for the first time since the fourth quarter of 2010 (versus the previous quarter). Gross fixed capital formation fell 1.1 percent compared to the fourth quarter of 2011. Declines were seen both in equipment investment (down 0.8 percent) and investment in noncurrent assets (down 1.2 percent). Construction investment fell by 1.3 percent from the previous quarter, although this may have been influenced to some extent by harsh weather in February.

Net exports also provided positive momentum in the first quarter. Exports rose 1.7 percent over the previous quarter, while imports were unchanged. Demand for German products grew most in the BRIC countries. Year on year, Russia imported 17.5 percent more goods from Germany in the first quarter of 2012. Brazil imported 15.6 percent more, India 7.3 percent more and China 6.1 percent more. Trade with EU member states shows the impact of the ongoing sovereign debt crisis. Exports to Portugal tumbled 12.9 percent, and exports to Spain and Italy dropped 7.7 and 7.5 percent respectively. Exports to the UK, the Netherlands and France – countries that have not yet had any refinancing problems on the capital markets – increased by 9.6, 8.5 and 6.9 percent respectively. Improvements in the US and Japanese economies were reflected in German exports to these countries, which rose by 21.4 and 18.4 percent respectively.

On the import side, Germany bought more during the first quarter from Italy (7.7 percent), Portugal (7.5 percent) and Spain (0.7 percent). This has significantly reduced Germany’s trade surplus with these countries. Overall, German imports rose 4.8 percent year-on-year during the first quarter of 2012, though they are still far behind German exports, which rose 5.8 percent for the same period. That said, imports from some countries did show a decline, with China down 0.4 percent, India down 2.4 percent and Japan down 4.3 percent at the start of the year.

The labour market has continued to develop well, although weaker economic growth has meant it is not developing as strongly as in late 2012. In May 2012 the number of employed persons stood at 41.6 million. This represents an increase of 1.4 percent (561,000) over the previous year. In April 2012 (latest figure available), the number of employees paying into the social security system had risen by 2.4 percent (666,000) year-on-year to reach 28.9 million. The number of unemployed fell by 46,000 or 2 percent to 2.8 million from May to June 2012.

Lower unemployment and continued improvement in the number of employed persons will further stabilise consumer demand. Retail revenue fell slightly in April, yet German consumer sentiment remains positive despite the turbulence in the euro-
zone. In its July report, consumer research firm GfK said that consumer confidence had shown another modest increase. Although there is greater pessimism about the future of the economy, which in itself helps to lower the indicator, German consumers’ income expectations and propensity to buy have con-
tinued to show significant improvement. This has ultimately continued to spur on domestic demand.

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Incoming Orders/Industrial Production

Orders returning to upward trend

Preliminary data indicate that incoming orders for German industry rose by 0.6 percent (after inflation, calendar and seasonal adjustments) from April 2012 to May 2012 after falling by 1.4 percent in April 2012. Demand for large orders was below average in both months. A less volatile two-months comparison between April/May and February/March also shows that incoming orders for the industrial sector rose by a slight 0.4 percent. The two-months comparison shows that domestic orders rose 0.6 percent and foreign orders rose 0.2 percent. Foreign orders from non-eurozone countries declined 1.4 percent, whereas orders from eurozone countries showed an unexpected increase of 3.0 percent.

Among the main groups of industrial goods, intermediate goods were again in great demand in May 2012 (0.8 percent higher than the previous month), after having already climbed by 1.3 percent in April. The increase was primarily due to
foreign orders (up 2.4 percent); domestic orders were down slightly in May (-0.4 percent). Up 3.1 percent, eurozone demand was surprisingly stronger than demand from non-eurozone countries. The adjusted two-months comparison shows that demand for intermediate goods rose by 0.9 percent versus the previous period. Domestic demand was up 1.6 percent, much more than foreign demand (up 0.1 percent). The two-months comparison also shows the stronger demand to be coming from the eurozone.

Demand for capital goods edged up in May 2012 by a seasonally adjusted 0.2 percent over the month before. It had fallen by 2.9 percent in April 2012. Again, foreign clients were the ones driving demand for capital goods, with foreign demand increasing 1.6 percent as a whole and 11 percent in the euro-
zone. Domestic demand slid by 2.0 percent. A two-months comparison shows the index slipped slightly in May (down 0.1 percent). The eurozone provided a surprise in the area of demand for capital goods as well, where it rose by 3.1 percent in a two-
months comparison.

Demand for consumer goods rose by 3.5 percent in May after tumbling 4.5 percent the month before. The improvement was mostly due to a 10.9 percent jump in demand from the euro-
zone. Non-eurozone demand for consumer goods rose just 6.2 percent. Domestic demand fell again in May, down 2.3 percent after sliding 0.9 percent in April. A two-months comparison gives a similar picture. While eurozone demand rose 6.7 percent from February/March to April/May 2012, demand from countries outside the eurozone fell by 1.7 percent in the same period, and domestic demand dropped 1.5 percent. 

Production proving to be stable

Industrial production remains at a high level. Preliminary data show it rose 1.6 percent from April to May (after inflation, calendar and seasonal adjustments) after falling 2.1 percent a month earlier. Manufacturing was up 1.8 percent in May. Growth was strongest in consumer goods (up 3.8 percent), followed by capital goods (up 1.7 percent) and intermediate goods (up 1.0 percent). The construction sector also showed a big jump in May, up 3.1 percent. Energy production, on the other hand, fell by 1.6 percent.

A less-volatile two-months comparison between April/May and February/March shows that manufacturing dropped slightly, down 0.9 percent. Capital goods production fell the most, down 2.2 percent. Production of consumer goods was down 0.5 percent, while production of intermediate goods edged up 0.3 percent. The construction sector provided much-needed support, rising by 7.0 percent. Overall though, industrial production remained lower in May than it had been in the previous period (down 0.3 percent).

The business climate seriously deteriorated in the manufacturing sector in July 2012. The manufacturing companies surveyed for the ifo economic assessment were far more pessi-
mistic about their current business situation than they had been in June, when the survey revealed a slight improvement. Granted, the majority still considers the business situation to be good, but there was a sharp drop in the number of positive voices in July. Business expectations for the next six months deteriorated for the third time in a row. This is mostly likely due to growing concerns that the eurozone’s sovereign debt and banking crisis could get worse. After briefly entering the boom quadrant during the first quarter, the ifo Business Climate Index is now clearly in the downswing quadrant.

The Production proving to be stable. Photo: BDI/fotolia (Paul Stock)

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Outlook

German construction industry sees big jump in new orders. Photo BDI/fotolia (Jonn Rübcke)

Real economy solid, political environment anxious

So far the German economy has been doing a very good job at holding steady in a challenging environment clouded by a sovereign debt and banking crisis and a bleak economic outlook for Europe. After the drop in GDP in the fourth quarter of 2011, it managed to avoid the technical recession that many at the beginning of the year predicted would follow. In fact, German economic growth was surprisingly strong in the first quarter of 2012, with a gain of 0.5 percent over the previous quarter. Compared to the first quarter of 2011, it climbed a full 1.7 percent. There are many signs that the German economy will continue to grow in the second quarter. In the manufacturing sector, capacity utilisation was slightly higher in the second quarter than it had been in the first. This is yet another indication that capital investment could pick up again. In addition, the labour market has continued to improve, though not as vigorously. Combined with the significant pay raises that are expected to come out of this year’s bargaining rounds, this could really help to fuel consumer spending.

The German construction industry deserves special attention at this juncture as it can play a key role in economic development in the medium term. The industry has seen a big jump in orders since autumn 2011. One of the reasons for this is that foreign investors see German real estate as a safe alternative to the unstable capital markets. No one can say for sure at this point whether these are solid investments for the long term or
whether they will lead to a bubble. However, there are currently a lot of arguments against an industry-wide bubble. One is that the number of building permits is still far lower that it was in the 1990s. Another is that residential construction is not the only area experiencing higher demand; commercial construction is also thriving.

German businesses remain highly competitive at the international level. Their strength will not be an impediment to continued growth. The German economy’s greatest export successes are still happening in the newly industrialised countries, even if the momentum seen after the crisis of 2008-2009 has diminished somewhat. And while the German economy holds the most sway in the eurozone, much like the United States does in the global economy, it would be foolish to say that Germany can be the economic engine of Europe. It is as ill-equipped to handle that role as the German taxpayer is to shoulder the burden of the eurozone sovereign debt crisis. However, since the supply chains of German businesses criss-cross the whole of Europe, Germany’s success in exporting to non-member countries also spurs on the economies of other countries within the eurozone.

The German economy is still in extremely good health as of
mid-2012. The good start to the year combined with stable in-
coming orders and production indicate that the growth forecast of one percent that the BDI issued at the beginning of the year is still very realistic. A lot now depends on how eurozone governments manage the current sovereign debt and banking crisis. A breakthrough in the crisis would be most welcome, but it is not very likely. The alternative, which has been the rule until this point and which we would describe as »muddling through«, has indeed prevented a sudden crash – but it hardly creates a
reliable framework for long-term growth.

Policy Agenda

We need a firm plan to save the euro. Photo: BDI/fotolia (Olaf Schwenty)

Building confidence is key to resolving the crisis

The eurozone is in an economic crisis. Many of its economies have excessive debt, insufficient growth, rising unemployment and a dangerously lopsided trade balance. All previous
attempts to bring the situation under control have brought brief respites but no lasting improvements. The financial markets are still agitated, and there is still little sign of confidence in the
future.

In the midst of this tumultuous environment, the German economy has been performing surprisingly well. Yet as time goes on, there have been more and more signs that people are getting anxious. Policymakers must do everything in their power now to ensure that this anxiety does not take hold as this would not only be bad for Germany, it would be bad for Europe too. Germany is well-positioned to be economically successful both now and in the future. But for that to happen, we urgently need stability at the European level. Germany has a key role to play in this challenge.

Europe urgently needs a coherent, inspiring construction plan for the future. And the people of Europe need to be convinced that working together to build this European structure will pay off. This is a realistic goal according to the German Bundesbank’s latest monthly report. Using criteria that characterise an optimal currency area, it examined whether the members of the eurozone might be better off with some other currency system than the one they have now. It found that all eurozone countries still have an economic structure that is essentially in conformity with membership in the monetary union. However, for them to remain in good standing as members, it said, they need to enact responsible, far-sighted wage policy and fiscal policy. Evidence of this, it said, could be seen in the economic imbalance that has emerged in past years and in the sovereign debt crisis currently affecting some countries in the monetary union. Implementing structural reforms in the eurozone’s crisis countries could fix the weaknesses in the monetary union, it concluded.

This diagnosis should encourage policymakers to fervently pursue just such an approach to save the euro. Measures like these must be added to the fiscal pact as they help European economies get back on the path to growth. Europe desperately needs growth and jobs, yet governments cannot create growth on their own. Private investment is essential to growth too. Struggling member states need to reduce investment barriers and create incentives for private investment. This is the only way to generate confidence in the future, which is the foundation for economic growth and the key to overcoming the crisis. It will also be the only way to keep the European monetary union together.

 

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