Facts, Fantasy

Still in the Export Business

Hamburg port source thomas raupach_effect
Still in the business.
  • Why it matters

    Why it matters

    If Germany is moving from being an export economy to one driven by spending, it would lose market share to its European partners and its growth could slow.

  • Facts

    Facts

    • The Ukraine crisis, a possible Grexit, and the new minimum wage law in Germany haven’t derailed the country’s economy.
    • Many E.U. members, the United States and international groups such as the IMF want Germany to consume more and export less in order to help its trade partners.
    • Even a short-term analysis doesn’t show the significance of private consumption has markedly increased.
  • Audio

    Audio

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The year started well for the German economy with good news from the labor market and strong early indicators for industry and consumption.

Many bank analysts and research institutions have accordingly revised their economic growth forecasts upward for 2015. The new consensus is 2 percent.

Geopolitical risks such as the Ukraine crisis, speculation about a “Grexit” and the introduction of a minimum wage haven’t derailed the German economy.

Most commentators identify a boom in consumer spending as the major reason for the powerful upsurge. The economy is receiving impetus from a vigorous rise in real wages along with higher employment, and from greater purchasing power because of the low price of oil. The Kiel Institute for the World Economy is predicting the strongest increase in private spending since 1992: 2.7 percent.

Many economists interpret this as a paradigm shift and say a fundamental change in the German economic model is possible, oriented away from exports, towards consumption.

Not every figure, just because it is currently desirable, signals the retreat from an economic model established over many decades.

That would come closer to the model that predominates in the United States and in most countries of the European Union.

Germany’s large E.U. partners and international organizations such as the Organization for Economic Co-operation and Development and the International Monetary Fund consider this transformation long overdue. They have been calling on Germany to consume and import more, so as to help its trading partners out of the crisis.

Are we on the way to a decline in export surpluses and to an economic growth driven predominantly by consumption?

Renowned French economist Patrick Artus argues Germany has already taken significant steps in this direction: real wages that increase significantly faster than productivity, plus a higher proportion of private consumption in domestic demand.

Mr. Artus forecasts that if this change continues in the longer term, German export capacity will decline, the country will lose market share to its E.U. partners and potential growth will flatten out if investments remain weak. His prognosis in a nutshell: The change in Germany’s economic model will put the brakes on the country’s economic growth.

But are we really traveling along this path?

If that were the case, then it would have to be reflected in overall economic data. Let’s first take a look at the figures for 2014: the German gross domestic product grew by 1.6 percent, and of that rate of growth, 0.7 percent came from private consumption. That is a hefty contribution, but gross fixed capital formation also contributed to growth to the same degree, and 0.4 percent was due to the export surplus.

If the German economic model were to change, then the contribution of private consumption would have to rise in the medium term, and in 2014 it would have had to be higher than the average of the previous five years.

The fact is, however, that from 2010 to 2014, the gross domestic product rose on the average by 1.9 percent per year, with a little less than 0.7 percent being due to private consumption and to the trade surplus respectively, and with a little less than 0.6 percent being attributable to investments.

It might be that this view is still too short-term to actually identify the trend. If with its aging population Germany were to become a consumption-oriented country, then this would become apparent in a long-term comparison of the components of the gross domestic product.

But here as well, reality looks different: Private consumption made up 56 percent of the economy in the 1970s, and was a 57 percent proportion in each of the following three decades. Over the last five years, it has again made up 56 percent of the economy. It’s hard to imagine a more constant figure. In 2014, it even fell to 55 percent.

Since the 1970s, government consumption has made up 19 percent of the economy. The share of major investments, on the other hand, dipped from 24 percent during the 1970s to 19 percent most recently. In the same period, the share of the export surplus tripled from 2 percent to 6 percent.

To sum up: Not every figure, just because it is currently desirable, signals the retreat from an economic model established over many decades.

From a long-term perspective, the German model is astoundingly stable ― and even a short-term analysis doesn’t show that the significance of private consumption has markedly increased. The fact that the German consumer is in the current mood to spend more freely than in the past might be understood against a background of singularly favorable conditions — but this definitely doesn’t mean German companies are turning their backs on the world market.

 

To contact the author: heilmann@handelsblatt.com

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