Germany's Incredible Shrinking Economy

The Financial Times says this is worse than feared, and I say it is just what I was expecting (see here, I do hope that doesn't make me one of those "visionaries" you are all so busy talking about).

Germany’s economic slump in the final quarter of 2008 proved worse than feared, official figures showed on Friday, with the country posting the sharpest fall in gross domestic product since the country was reunified in 1990.The larger-than-expected 2.1 per cent plunge in GDP in the final three months of the year showed Europe’s largest economy contracting at a faster pace than the UK in the same period and threatening to drag down the performance of the 16-country eurozone.

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A 2.1% quarterly contraction, for those who are confused by the way we economists do things, is equivalent to an 8.4% annualized rate of contraction, which is quite something (although in fairness some of this comes from Q3 when there was a big build up in inventories, which has now unwound). But the real question, when all the dust settles, is going to be why it is that economies like those of Germany and Japan are so incredibly export dependent (remember, all those "decoupling" arguments which were so in fashion not very long ago). My view is 'it's the demography, stupid', but then, we can't go back 30 years and change all that with the wave of a wand, so we really do need some out of the box thinking on the global imbalances soon (see Claus's arguments in his last post).

Meantime the EU is working furiously on the next 'top secret' European bank bailout proposal (does this have anything to do with the unexpected rapid departure of Michael Glos last weekend? - all of this was most strange, see here). Details of the coming bank bailout proposals are still scarce at this point, but the excitable Telegraph did come up with a very hair-raising number (16.3 trillion pounds, see here). As I have been arguing, far from Germany superseding the rest of the EU, Germany may well be at the heart of the bailout, needing support from the rest of us, which is why we need EU bonds, and we need them now. United we stand, divided we go down the plughole!

And if you have any doubt about the export connection, just look at the chart below. Not an exact fit, but an obvious close correlation. Germany needs a demographic fix - simply going for longer shopping hours (and the like) won't work in a case like this.

And as for labour market reforms, just look how many jobs Germany created this time round.

Comments

[Roberm73:]

It is a race to zero for both the EU banks and the US banks. the only question left is will the Euro Surive.

Feb 13 09:52 AM

[cyclingscholar:]

YIPPEE! I hope Germany drags the rest of the EU into the total irrelevance that it is. France hoodwinked germany into going off the the Mark, and linking hands with socialist weenies like Italy and Greece. Militarily the EU couldn't hold back a Russian Division with Helen Keller and Stevie Wonder as staff officers. Intelligencewise the EU can't even penetrate gangs of soccer hooligans.

It will be painful but i'll enjoy europe's descent into irrelevance. Switzerland will rise again.


cyclingscholar

Feb 13 10:27 AM

[Taylor Gray:]

Interesting comments on the EU bailout. There was much made in the US about Treasury Secretary Geithner's lack of specifics on the financial bailout plan on Tuesday. The markets and pundits panned him. I know there is a G7 meeting going on today. Perhaps the US is delaying specifics because they are being worked out in conjunction with the EU. Geithner promised somthing big - and a syncronized global approach would be big indeed if indeed it comes to pass.

Feb 13 10:45 AM

[ROLEX18:]

I live in Frankfurt, yeah, economic statistics are not bright but when I compare myself to Americans I know and who also work in finance, they are so very very poor and work so hard hard, I have zero loans, zero debt as most people in Germany, but what I buy with cash, my American collegues pay with credit cards even micro purchases, you can feel they have nothing, only job, job, job and no future.

Feb 13 11:39 AM

[Wide Moat I...:]

Ouch! Italy down 1.8%; France down 1.2; UK down 1.5.

Industrial production down 4.9% in Germany in Dec; Ireland down 10.2!

Crises on this scale push nations to turn inward. Beggar thy neighbor begins.

Feb 13 12:04 PM

[sunnsea:]

cyclingscholar: your medeval mind set is what has ruined the US for the past 30 years.

ROLEX18: I would take your health care system, high speed rail and paid 6 week vacations over the barbarianism of the US capitalist financial/oil/defense system that has now been totally discredited.

Feb 14 12:48 PM

[Firat Ünlü:]

"But the real question, when all the dust settles, is going to be why it is that economies like those of Germany and Japan are so incredibly export dependent"

I think you need to look at this from a different angle. First of all, Germany and Japan produce competetive goods that, given the ability to consume, are demanded. This of course leads to them building industries that service this extra demand, once the demand vanishes there's nowhere to go for the surplus products and GDP shrinks. Whilst it looks bad on paper to have your economy shrank by 2.1% in a single quarter it is in relative terms not that bad as the economies themselve are still competetive, it's just that there's no longer an external market to absorb excess capacity.
GDP will shrink in alignment with internal factors, but the economy will remain capable of a potential 'push' should external demand come up.
It is far more dangerous to be the economy that consumes more than it produces in the midde to long-run, as that not only involves 'natureal' shrinking to a healthy domestic level but real shrinking.

Feb 14 07:40 PM

[homes:]

A home is a place of residence or refuge.[1] It is usually a place in which an individual or a family can rest and be able to store personal property. Most modern-day households contain sanitary facilities and a means of preparing food. Animals have their own homes as well, living either in the wild or in a domesticated environment.

Feb 17 05:24 AM

[Kelifornia:]

Hey Rolex18: Have you ever been to America? Maybe your "American friends" are the crazy ones with lots of credit. Not all Americans live on credit but even the ones who do have a better life in America. We have true FREEDOM of opportunity that the average German will never fully understand. I'd rather be an American then live with the history of what Germany tried and failed to do (thanks to the British and Americans) in horrible wars that cost millions of innocent lives. You should be thanking God every day that America defeated Germany and then UNITED Germany so your sorry butt can have somewhat freedom in a socialist society which is far better than a crazy dictator society which is what you had.

Love from California (by the way, it's 75 degrees here with an ocean view).

Feb 19 04:14 PM