Germany's economy: A view from another planet
Germany's economy: A view from another planet
Feb 17th 2005
From The Economist print edition
A contrarian view of the German economy
NATIONAL stereotypes can become outdated. Some British food today holds its own against French cuisine. Swiss trains do not always run on time. Similarly, Germany's image as the sick man of Europe, with high costs and flabby firms unable to compete in the global marketplace, is now starting to curl at the edges. German business is regaining its vigour.
To make such a claim in the week when new figures showed that Germany's GDP fell by 0.2% in the fourth quarter of last year, leaving output only 0.6% up on a year ago, may seem a touch unworldly. However, coming from a different planet sometimes makes it easier to peer through the conventional wisdom. A Martian landing on Earth today and faced with a choice between investing in America or Germany might well choose the latter.
How can Europe's slowest-growing economy possibly be a good investment? Commentators marvel at the gains in productivity and profits in America in recent years, thanks to firms' aggressive cost-cutting. Yet corporate Germany has made even greater strides to cut costs and improve its competitiveness. A study by Deutsche Bank suggests that Germany's productivity growth has been just as fast as America's since 1995 if both are measured on the same basis. Wages in Germany, however, have grown more slowly, so unit labour costs have fallen. Partly thanks to such pruning, Germany's real trade-weighted exchange rate with the rest of the world (based on relative labour costs) has risen by only 4% since early 2002 despite the surge in the euro against the dollar (see article).
German business is supposedly too flabby to compete in world markets. Yet over the past five years German exports have grown more than three times faster than America's, pushing Germany ahead of America as the world's biggest exporter. Germany is the only G7 country that has increased its share of world exports over the past five years, a period of increasing Chinese competition. America's share of world markets has dropped from 14% to 11%. To our Martian, it might appear that America, not Germany, is the deadbeat economy. Corporate profits have also been rising faster in Germany than in the United States. German equities have outperformed those on Wall Street over the past couple of years, yet p/e ratios suggest that Deutschland Inc looks like an excellent “buy”.
The paradox of thrift
But if German business is in such great shape, why is the country's economy not growing more strongly. The blame lies with weak consumer spending and business investment, largely as a consequence of the successful efforts of German firms to become fitter. Real wages have been squeezed and workers, fearful of losing their jobs and of looming cuts in welfare benefits, are saving more. Higher profits will eventually encourage new investment and jobs, but the short-term cost is weaker growth. One thing that the government could do to speed up this process is to remove barriers to job creation, especially in services, which are choked by a tangle of red tape.
Some critics also urge Germany to ease its monetary and fiscal policies to boost spending. If only it could: interest rates are set by the European Central Bank on the basis of monetary conditions in the whole of the euro area, not just in Germany; in any case, real interest rates are historically low. Germany could further flout Europe's ill-conceived fiscal rules, run a bigger budget deficit and cut taxes. But households, already worried about how the government will pay their future pensions, might save, not spend, any tax cuts.
Against the 11% of their income put aside by Germans, American households save less than 1%. America's government is also far more spendthrift: adjusted for the economic cycle, its budget deficit is twice as large as Germany's. As a result of inadequate saving, America has a current-account deficit of 6% of GDP. By contrast, Germany has a surplus of 3%. It is true that less saving and more borrowing has propped up consumer spending in America, but one wonders how long that can last. Without higher saving, American investment and hence future living standards will eventually be constrained. In some ways, a Martian might argue, America's economy needs more restructuring than Germany's.
Feb 17th 2005
From The Economist print edition
A contrarian view of the German economy
NATIONAL stereotypes can become outdated. Some British food today holds its own against French cuisine. Swiss trains do not always run on time. Similarly, Germany's image as the sick man of Europe, with high costs and flabby firms unable to compete in the global marketplace, is now starting to curl at the edges. German business is regaining its vigour.
To make such a claim in the week when new figures showed that Germany's GDP fell by 0.2% in the fourth quarter of last year, leaving output only 0.6% up on a year ago, may seem a touch unworldly. However, coming from a different planet sometimes makes it easier to peer through the conventional wisdom. A Martian landing on Earth today and faced with a choice between investing in America or Germany might well choose the latter.
How can Europe's slowest-growing economy possibly be a good investment? Commentators marvel at the gains in productivity and profits in America in recent years, thanks to firms' aggressive cost-cutting. Yet corporate Germany has made even greater strides to cut costs and improve its competitiveness. A study by Deutsche Bank suggests that Germany's productivity growth has been just as fast as America's since 1995 if both are measured on the same basis. Wages in Germany, however, have grown more slowly, so unit labour costs have fallen. Partly thanks to such pruning, Germany's real trade-weighted exchange rate with the rest of the world (based on relative labour costs) has risen by only 4% since early 2002 despite the surge in the euro against the dollar (see article).
German business is supposedly too flabby to compete in world markets. Yet over the past five years German exports have grown more than three times faster than America's, pushing Germany ahead of America as the world's biggest exporter. Germany is the only G7 country that has increased its share of world exports over the past five years, a period of increasing Chinese competition. America's share of world markets has dropped from 14% to 11%. To our Martian, it might appear that America, not Germany, is the deadbeat economy. Corporate profits have also been rising faster in Germany than in the United States. German equities have outperformed those on Wall Street over the past couple of years, yet p/e ratios suggest that Deutschland Inc looks like an excellent “buy”.
The paradox of thrift
But if German business is in such great shape, why is the country's economy not growing more strongly. The blame lies with weak consumer spending and business investment, largely as a consequence of the successful efforts of German firms to become fitter. Real wages have been squeezed and workers, fearful of losing their jobs and of looming cuts in welfare benefits, are saving more. Higher profits will eventually encourage new investment and jobs, but the short-term cost is weaker growth. One thing that the government could do to speed up this process is to remove barriers to job creation, especially in services, which are choked by a tangle of red tape.
Some critics also urge Germany to ease its monetary and fiscal policies to boost spending. If only it could: interest rates are set by the European Central Bank on the basis of monetary conditions in the whole of the euro area, not just in Germany; in any case, real interest rates are historically low. Germany could further flout Europe's ill-conceived fiscal rules, run a bigger budget deficit and cut taxes. But households, already worried about how the government will pay their future pensions, might save, not spend, any tax cuts.
Against the 11% of their income put aside by Germans, American households save less than 1%. America's government is also far more spendthrift: adjusted for the economic cycle, its budget deficit is twice as large as Germany's. As a result of inadequate saving, America has a current-account deficit of 6% of GDP. By contrast, Germany has a surplus of 3%. It is true that less saving and more borrowing has propped up consumer spending in America, but one wonders how long that can last. Without higher saving, American investment and hence future living standards will eventually be constrained. In some ways, a Martian might argue, America's economy needs more restructuring than Germany's.
junge - 20. Feb, 15:28
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