Disturbing Data

A Setback, Germany's Economic Slowdown Could Be Worse

Worried about your factory looking like this? Source: Udo Lehmann
Worried about your factory looking like this?
  • Why it matters

    Why it matters

    Germany’s slowing economy may be a wake-up call for Chancellor Angela Merkel’s coalition, which has introduced a series of potentially costly social reforms.

  • Facts


    • Germany accounts for more than one-quarter of the euro zone economy.
    • In other euro zone countries, Italy has fallen back into recession and the French economy is limping along.
    • After second-quarter decline, the yield of 10-year bonds in Germany dropped below 1 percent for the first time.
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The German economy shrank slightly in the second quarter of 2014. This first decline since the end of 2012 might not be good news, but it certainly is no shock.

First, there are statistical reasons for the drop.

Government economists try to account for differences in the calendar year between individual quarters, but it’s not 100 percent accurate. The number of actual working days in a quarter can be easily determined, of course.

But nobody really knows how production is affected by a high number of “bridge days” ­– vacation days taken between a public holiday and the weekend. The weather makes things even trickier. During mild winters, there is indeed more work on construction sites than usual. But seasonal adjustments are based on normal weather conditions so increases in production are often overstated, which is exactly what happened in the first quarter.

A logical consequence is an understated second quarter.

Second, official figures always look at past performance and make no predictions about future growth.

Here’s one important early indicator for the German economy, however: Optimism felt at the beginning of the year has vanished. Germany’s Business Climate Index – prepared by the Institute for Economic Research in Munich – has fallen for three consecutive months now.

Also, incoming orders for German industry were noticeably down from the first three months of the year.

But currently the biggest problem is the extreme fragility of economic recovery in the euro zone, by far Germany’s most important trading partner.

The reasons are clear. The level of global uncertainty has increased, especially due to the escalating crisis in Ukraine.

A rational business reaction to higher uncertainty is to wait it out.

But currently the biggest problem is the extreme fragility of economic recovery in the euro zone, by far Germany’s most important trading partner. After 0.2 percent growth in the first quarter for countries that use the euro currency, second- quarter results released on Thursday showed no growth, confirming the stagnant outlook.

There might be a bright side to the end of Germany’s economic euphoria though. The cold shower for Chancellor Angela Merkel’s governing coalition was surely overdue after riding a wave of economic well-being despite making many decisions that hurt growth. The gravest economic mistakes are always made during good times.

With state coffers full and prospects rosy, decisions are being made to increase long-term spending, which will still need to be financed during the next economic downturn. The new federal minimum wage, retirement at 63 and more public spending overall – none of these will help secure future growth for an aging Germany.

Am Sonnenberg Linden Nordrhein-Westfalen Deutschland
An old factory in Linden in northwest Germany. Source: Medienwerkstatt.de


The most important foundation of stable economic development is a healthy job market. High employment and reasonable wage increases guarantee stable consumer spending and well-filled government coffers. So one way to test the resilience of Germany’s “jobs miracle” would be to put recent successes at risk through poor fiscal planning for the years ahead.

Of course, it’s nice to have a balanced budget now. But Germany’s finance minister, Wolfgang Schäuble, has no reason to congratulate himself. He can thank the European Central Bank chief, Mario Draghi.  According to estimates of the Bundesbank central bank, Germany has saved €120 billion, or about $160 billion, since the outbreak of the financial crisis, thanks to low interest rates.

Anyone worried about a small quarterly fall in the gross domestic product should sit down and calculate the consequences of a future turnaround in interest rates for government borrowing and corporate loans. Now that’s a really scary scenario.

Axel Schrinner is an editor for Handelsblatt who covers tax and fiscal policies.  He can be reached at schrinner@handelsblatt.com

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