If The Germans Were Serious About Stabilizing Aggregate Demand

Includes: EWG
by: David Beckworth

Then they would be doing exactly what they are doing now, if their only concern were Germany. Last week the Federal Statistics Office of Germany released third quarter nominal GDP data where we find relatively robust growth in aggregate demand:

This above-trend growth is entirely consistent with the reluctance of the Germans to open up the ECB monetary spigot. Doing so would only serve to further raise aggregate demand above trend growth. The Germans are probably concerned that the additional nominal spending stimulus would raise inflation uncomfortably high and create a positive output gap. Maybe the Germans are hardcore nominal GDP targeters.

But are the Germans really focusing on just their own aggregate demand growth? It is a strange argument to make since the ongoing collapse in eurozone aggregate demand (see figure below) will ultimately affect the German economy too. Nonetheless, it is hard not to wonder these thoughts given the eurozone seems to have been serving German interests all along and the recent reluctance of the Germans to meaningfully address the eurozone crisis. It is also not hard to think these thoughts when one comes across statements such as the rather cheery press release accompanying the third quarter GDP numbers (my bold):

Gross domestic product in 3rd quarter of 2011: upswing continues

WIESBADEN – The German economy continues its growth: In the third quarter of 2011, the gross domestic product (GDP) rose 0.5% – upon price, seasonal and calendar adjustment – on the second quarter. In addition, the result for the second quarter of 2011 has been corrected upwards to +0.3%, as reported by the Federal Statistical Office (Destatis). This means that, following the strong growth at the beginning of the year (+1.3% in the first quarter), the upswing of the German economy continued in the course of 2011, with the growth rate slightly increasing in the reference quarter compared with the previous quarter.

In a year-on-year comparison, too, the GDP grew strongly, although not as strongly as in the first half of the year: In the third quarter of 2011, the price-adjusted GDP was up 2.5% on a year earlier (calendar-adjusted: +2.6%).

And lest you think this is an isolated case, below is a recent AP story on consumer confidence in Germany:

BERLIN (NYSE:AP) — A survey finds that consumer confidence in Germany, Europe's biggest economy, is holding up despite increasing worries about the economic outlook. The GfK research institute said Tuesday that its forward-looking consumer confidence indicator for November stands at 5.3 points — up from 5.2 points in October. GfK says that consumers "remain very optimistic" about income expectations and that their willingness to buy also is being helped by low unemployment and rising salaries.

Really? German consumers remain very optimistic about income expectations and future spending despite the onward march to Eurogeddon? Do they know something we do not know? Or, are they so caught up in the relative successes of the German economy that they fail to fully appreciate what is happening in the rest of the eurozone?

In case there were any questions, what has happened to aggregate demand in the rest of the eurozone can be seen below. First, nominal spending has never recovered from its collapse in 2008 and 2009:

Moreover, nominal spending has actually fallen over the past two quarters:

Now maybe the German public does appreciate what is going on in the eurozone, but simply are not fazed by it. One reason for this might be their belief that they can force the rest of the eurozone to become more German-like as this "we have them by the balls" comment indicates. A second reason is that in a worst-case scenario the eurozone breaks up and they return to their beloved Deutsche Mark with a relatively resilient German economy. Whatever the motivation may be, what we do know is that the Germans are doing a fine job stabilizing aggregate demand in Germany.