| Click for the Finfacts Ireland Portal Homepage |

Finfacts Business News Centre

Home 
 
 News
 Irish
 Irish Economy
 EU Economy
 US Economy
 UK Economy
 Global Economy
 International
 Property
 Innovation
 
 Analysis/Comment
 
 Asia Economy

RSS FEED


How to use our RSS feed

 
Web Finfacts

See Search Box lower down this column for searches of Finfacts news pages. Where there may be the odd special character missing from an older page, it's a problem that developed when Interactive Tools upgraded to a new content management system.

Welcome

Finfacts is Ireland's leading business information site and you are in its business news section.

Links

Finfacts Homepage

Irish Share Prices

Euribor Daily Rates

Irish Economy

Global Income Per Capita

Global Cost of Living

Irish Tax - Income/Corporate

Global News

Bloomberg News

CNN Money

Cnet Tech News

Newspapers

Irish Independent

Irish Times

Irish Examiner

New York Times

Financial Times

Technology News

 

Feedback

 

Content Management by interactivetools.com.

News : EU Economy Last Updated: Aug 17, 2010 - 9:29:51 AM


Germany: 2003; 'Sick man of Europe'; 2010; Eurozone growth powerhouse
By Michael Hennigan, Founder and Editor of Finfacts
Aug 16, 2010 - 2:47:21 AM

Email this article
 Printer friendly page
Germany was dubbed the 'sick man of Europe' as recently as 2003 but its stunning annualised growth of almost 9% in the second quarter, confirms it status as the powerhouse of the Eurozone.

German growth slowed following high spending during the first decade of reunification in the 1990s and at the height of the property bubble, Irish politician, Mary Harney, reeking of 'nouveau riche' arrogance, turned on the paymaster of billions in European cash support for Ireland, when she disdainfully spoke of Ireland being closer to Boston than Berlin. In recent times, as the wheel of fortune has turned, some people have the brass neck to claim German success is the cause of the woes in countries such as Ireland, Greece.

Prof. Hans-Werner Sinn of the Ifo institute, had a book published in 2003: Ist Deutschland noch zu retten? (Can Germany Be Saved?) - - Its blurb read: “Taxes keep rising, the pension and health insurance systems are ailing. More and more companies are going bankrupt or are leaving the country. Unemployment has reached alarming levels. Germany is outperformed by its neighbours. Its growth rates are in the cellar, and it can’t keep up with Austria, the Netherlands, Britain or France. Germany has become the sick man of Europe.“

Recently, Prof. Sinn made the point that in 2008, only 40% of German savings were invested domestically and while German banks lacked prudence with some of their lending, Germany had not erected a fortress with one-way autobahn routes.

The SPD-Green government of Gerhard Schröder, who was chancellor in the period 1998-2005, introduced labour and market reforms and despite enduring the worst recession since 1945, Germany achieved a remarkable success in holding unemployment growth very low from an October 2008 low, through a mix of short-time work, flexible labour contracts and healthy companies coming into the downturn. Schröder had paid a political price for the reforms but alas, that is the usual downside of political courage.   

At the height of the sovereign debt crisis last May, there was shroud-waving a-plenty and Irish commentator, David McWilliams, blamed Germany for the economic troubles of Greece and by extension, the Irish property bubble: "Greece is the symptom of this crisis, but Germany is the cause...It is only right that Germany pays for the Greek problem, because Germany is the reason for the crisis."

The admirable Greek prime minister, George Papandreou, son and grandson of former Greek prime ministers, who was born in the United Sates where his father Andreas had worked as a professor of economics and has an American mother, acknowledges that Greece is primarily responsible for its economic mess.

Media commentator and Harvard University professor, Niall Ferguson, wrote an article, The End of the Euro: How the crisis in Greece could lead to the demise of Europe's most ambitious project, in a May  issue of Newsweek and warned: "Europe now faces a much bigger decision than whether to bail out Greece. The real choice is between becoming a fully fledged United States of Europe, or remaining little more than a modern-day Holy Roman Empire, a gimcrack hodgepodge of 'variable geometry' that will sooner or later fall apart."

The Finfacts comment was: "EMU is likely to last much longer than the loss-making Newsweek, which was put on the auction block this week and Prof. Ferguson will undoubtedly move on to other beguiling hopeless cases."

Newsweek was sold by The Washington Post for $1 in early August and the likes of Ferguson will not of course be deterred from chasing more headlines.

German export data last Monday showed that most of its trade surplus results from exports outside the EU and other members of the currency union are gaining from Germany's rebound.

So Germany is benefiting from politically difficult reforms and despite massive public spending since 1991, GDP per capita in the former East Germany is about 70% of the level in the former Federal Republic. Convergence within Germany or in the Eurozone, is a long process.

The misgoverned countries during the boom can only recover through change and reform.

Deutsche Bank Research economist, Stefan Schneider, commented on Friday:

German GDP expanded by a miraculous 2.2% in the second quarter (+4.1% yoy), beating all records. The Federal Statistical Office says the stimuli came mainly from exports and investment activity, but the growth was also driven partly by household and government consumption.

In addition, it revised up the Q1 figure from 0.2% growth to 0.5%. (The lower growth rates announced originally fell far short of what our models forecast. This is the reason we partly discounted our models’ forecast of 2% qoq for Q2. That has now proved to be unnecessary). The increase in exports comes as little surprise as the recovery of the global economy probably peaked in the first half. Most of the capital expenditure was probably in the construction sector, as considerable investment had to be postponed in Q1 because of the harsh winter.

Good start into Q3

Confidence indicators such as the ifo Index (up 4.4 points on the previous month) and the PMI (Purchasing Managers' Index up 2.8 points) made veritable leaps in July and are now only a hair’s breadth away from past highs. The export industry in particular is jubilant. Since the start of the year, foreign orders have increased by 3% per month on average. In June the value of German goods exports fell short of the June 2008 record by only 1.7%. This suggests that GDP will probably expand at around ¾% qoq in the third quarter, again outstripping trend growth.

GDP forecast for 2010 boosted to 3 ½%

Right at the start of 2010, Deutsche Bank was already among the first forecasters to look for 2% expansion in Germany in light of the increasing signs of a dynamic global recovery. Considering the excellent report for H1 the year-on-year performance at mid-year is now nearly 1 ½ pp higher than assumed to date. This has led us to raise our forecast for full-year growth - - on an unchanged trend forecast for H2 – to 3 ½%. This is a really breath-taking number, but it has to be viewed in connection with the year-earlier slump, which the Federal Statistical Office also revised up from -4.9% originally to -4.7% now.

Caution is advised for 2011

H1 growth was very heavily driven by exports, and we know from past experience that domestic investment is closely correlated with export trade. So this makes it worth taking a closer look at the current export performance.

The current development of demand for exports can  - - at least theoretically - -  be broken down into three components:

  • The international inventory cycle

  • Catch-up effects from investment postponed in 2009

  • The underlying cyclical development in major customer markets

The first two components are, by definition, temporary in nature, and their impact is likely to ease substantially by the second half of the year. But the cyclical growth in key export markets indicates that the export growth rates will soon shrink significantly. Not only the temporary effects mentioned above but also the easing effects of monetary and above all fiscal policy measures play a major role in the process. This is highlighted by the current PMI trend in the two economies that were the main drivers of the global recovery over the past few quarters. In the US, the PMI has lost nearly 5 points since April. Poor labour-market readings have induced the Fed and our hitherto bullish US colleagues to revise down their growth expectations for the second half. In China, the PMI started to decline back at the start of the year, and in fact the index slipped in June below the boom/bust level of 50, to 49.4. The degree of importance for German exporters of these countries’ industrial growth, as reflected by the PMIs, can be seen in the following chart. German export growth (yoy) shows a correlation of 0.8 – with a time lag of four months – with the PMI readings in China and the US (weighting by export shares, with China as a proxy for Asia as a whole). This time lag is clearly visible in the German export slump in autumn 2008 and the subsequent recovery in spring 2009.

Exports set to weaken in H2 2010 and in 2011

Regardless of the current euphoria, the chart sends a clear message: during the second half of the year export momentum is poised to ease substantially, especially since the PMIs of major European trading partners such as France and the United Kingdom have been trending south for several months and the growth implications of the fiscal consolidation measures in various European countries still lie ahead.

GDP growth: Cautious forecast for 2011 is warranted

The surprisingly good growth performance in the second quarter, which will probably spill over to Q3, means that GDP expansion is likely to accelerate to 3 ½% for 2010 as a whole. Given the temporary effects and the cyclical downturn in key export markets, the 12% export growth of 2010 is poised to slow to about 6%. For this reason, we are sticking with our cautious forecast of 1 ½% GDP growth in 2011. Nonetheless, this means that the blow to GDP sustained in 2009 will probably be cancelled out by the performance in the coming year.

Related Articles
403 Forbidden

Forbidden

Execute access is denied.


© Copyright 2010 by Finfacts.com

Top of Page

EU Economy
Latest Headlines
Investor sentiment in Germany rose sharply in December
Eurozone business activity grew at a slightly faster rate in December
ECB hopes SME firms will gain from Thursday's refinancing operations
Ifo Institute says German economy to gain impetus in 2015
German per capita standard of living highest in Europe; Ireland below EU average
Youth unemployment problem in Eurozone pre-dated crisis
German imports fell sharply in October; Exports at monthly record high
German jobs rise all in full-time employment unlike in UK, Ireland
ECB to consider QE in January; Cuts forecasts
ECB and Bank of England keep rates at record lows
ECB Meeting: Draghi may reaffirm plans for QE or fudge it
Eurozone retail sales volume up in October - remains at 2004 level
German manufacturing wages are the highest of big industrial nations
Germany, France and Italy call for EU directive on tax reform
Manufacturing PMI surveys show Germany, France & Italy contracted in November
Eurozone inflation fell to 0.3% in November; Jobless rate in Germany lowest in Europe in October
German consumer climate improving as year draws to close
France's 10-year bond yield below 1% for first time; Draghi pushes for economic union
German employment at record high
Eurozone leading index fell in October; ECB to decide on QE early in new year
European Commission announces €315bn Investment Plan to get Europe growing
German Bundesbank calls for end to special treatment for sovereign bonds
Lux Leaks: European Commission facing censure motion in European Parliament
Euro bond yields fall to new record lows; Spain below 2%; Ireland at new record
German business climate improves for first time since April
British professor wants ECB to give every adult Eurozone citizen €500
Strong data from US this week and weak data elsewhere
Eurozone manufacturing/ services slowed to a 16-month low in November
European cars sales up in October for fourteenth consecutive month
German ZEW sentiment indicator jumps in November
Belgium accuses HSBC Private Bank of money laundering/ tax evasion
GDP up by 0.2% in Eurozone in Q3 2014 and up by 0.3% in EU28
German GDP up 0.1% in third quarter of 2014; France up 0.3%
European Commission expected to say Starbucks got special tax deal from Netherlands - Update
Juncker on Corporate Tax: Poacher-turned-gamekeeper proposes new rules
Eurozone industrial production in September recovers slightly from August slump
Architect of tax "racket" to commit EU to fight against tax fraud
German GDP growth will be below 1% in 2015; Former East still lags
Ireland accounted for 25% of ECB's emergency lending by time of 2010 bailout
Luxembourg Leaks: Irish Government's guff on tax system exposed; "Racket" needs to stop