German Growth

Time for a New Business Model

ARCHIV - ILLUSTRATION - Zwei Personen tragen am 20.02.2015 Einkaufstüten durch ein Einkaufszentrum in Berlin. Foto: Elisabeth Rahe/dpa (zu dpa "Konsumlust lässt Kassen klingeln: Bilanz der Einzelhandelsgeschäfte" vom 07.01.2016) +++(c) dpa - Bildfunk+++
German growth will be driven by consumer spending.
  • Why it matters

    Why it matters

    The German economy appears to be doing well, but its traditional, export-oriented business model is faltering.

  • Facts

    Facts

    • Consumer spending was the strongest driver of growth in the German economy in 2015.
    • The German economy is a heavily export-oriented economy.
    • Additional government expenditures triggered by the wave of immigration in 2015 will generate short-term growth.
  • Audio

    Audio

  • Pdf

The German Federal Statistical Office will present its preliminary economic report for 2015 on Thursday. With a growth rate of 1.7 percent, the German economy has seen its strongest growth since 2011. In addition, the government has achieved an increase in revenues amounting to 0.75 percent of the gross domestic product (GDP). Arithmetically, the tax authorities could have managed without the solidarity supplement and the inheritance tax without endangering the balanced budget. And, as we know, employment was higher and unemployment lower than they have been since German reunification. From a macroeconomic perspective, we can apparently sit back and relax.

But the first impression is deceiving, because the traditional German business model is beginning to falter. The contribution of foreign trade to growth was likely modest in 2015, almost a disgrace for many who long prided themselves in Germany’s reputation as the “world export champion.”

Consumer spending was probably the strongest driver of growth in 2015. This trend will intensify this year, as foreign trade curbs growth. All those who favor growth driven by exports and investments and view expansion stemming from consumer and government spending as bad growth should be rethinking their position. It is true that exports have traditionally fueled economic upturns in Germany, but it is wrong to view export-driven growth as “more valuable” than consumption-driven GDP growth.

Economically speaking, there is no good or bad growth. The United States traditionally relies on consumer spending as a driver of economic growth, while countries like Australia and Brazil emphasize commodities exports and Germany and Japan the export of high-quality industrial products, without which other types of exports would not exist.

But what is referred to as the German business model is not a concept devised by clever individuals. No one has ever planned our production structure on a drawing board. The high share of industry in German GDP and the resulting strong export orientation have developed organically in a period of almost 150 years. They are the result of comparative cost benefits in an increasingly specialized global economy.

The consequence is that the German economy benefited more than most others from growth in the world economy and world trade in the 1990s and the first decade of this century. Without the momentum of globalization, the Agenda 2010 package of reforms, wage moderation and the relaxing of wage agreements could not have developed in such positive ways. Structural reforms rarely trigger an upturn, but they do stimulate an economic recovery and curb a reversal.

But the world has changed. With the 2008/2009 global recession, globalization and the industrialization of important buyers of German durable equipment began a pause that continues to this day. The world hasn’t recovered this slowly from a recession since World War II, so that the often maligned investment weakness of our globalized economy is not a surprise. Under these conditions, Germany cannot expect a boost from foreign trade. Whether and when the globalization pause will end and German exports will return to being an engine of growth is unclear.

However, there is legitimate hope that Germany will see a domestic recovery. Even in the decade after reunification, it was mainly consumer spending that gave us growth rates of about 2 percent. It is indisputable that the chancellor’s decision to accept unlimited numbers of refugees from crisis zones constitutes an extreme challenge to society. However, we cannot overlook the fact that the additional government expenditures triggered by the wave of immigration will generate short-term growth, much like a Keynesian economic stimulus program – up to about 0.5 percent this year.

It is more important that the limits to growth posed by the aging and shrinking of the German population will be relaxed if we manage to successfully integrate many employable migrants into the labor market. The expansion and rejuvenation of the population are potential drivers of growth for developed countries.

The current wave of immigration comes to Germany at the best possible time. The government’s coffers are full and export-oriented industries are faltering, while service providers in the domestic economy are desperately seeking employees, even those without a high-school diploma or a craftsman’s training certif icate. Yes, we can do it, and our economy can even become more successful in the process.

 

To contact the author: ruerup@handelsblatt.com

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