Germany calm

China Crisis? What China Crisis?

Consumer confidence is high in Germany.
  • Why it matters

    Why it matters

    China is the world’s second-largest economy and is strongly tied to the German economy, Europe’s largest.

  • Facts


    • Government officials said on Tuesday the German economy grew by 0.4 percent in the second quarter.
    • In the first half of 2015, Germany’s budget surplus reached €21.1 billion ($24.07 billion).
    • Positive business indicators led state-owned German bank KfW to raise its 2015 growth forecast from 1.5 to 1.8 percent this week.
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German economists agree the cooling of China’s economy is an increasingly serious problem. Yet the development doesn’t seem to be affecting their homeland.

Germany’s top economist, Hans-Werner Sinn, said the country’s economic system continued to be steady amid the global financial turbulence, and the monthly business climate index issued by his Ifo Institute for Economic Research rose by 0.3 to 108.3 points on Tuesday – surprising most bank economists.

The business managers polled as part of the index assessed their firms’ current economic situation as being significantly improved over the previous month, and saw business in the coming six months as more or less stable.

As a result, the German government-owned development bank KfW raised its growth forecast for Germany from 1.5 to 1.8 percent for this year, and 2 percent for 2016.

Sigmar Gabriel, Germany’s vice chancellor and economy minister, appears convinced the stock market plunge in China is no threat to the German upswing. “From what we can judge, it will not contribute to a deterioration of developments in Germany,” he said. “You can see in the development of the euro there is again greater activity in Europe.”

“As long as other important export markets like the U.S., Great Britain, Eastern Europe or the euro zone continue to grow, Germany’s exports will remain robust.”

Carsten Brzeski, Chief economist, ING-Diba

Many experts share his upbeat predictions. “China’s economy is less important to Germany than many people believe,” said Unicredit economist Andreas Rees.

Carsten Brzeski, chief economist at ING-Diba, noted the drop in German exports to China in the first half of the year hadn’t shaken Europe’s largest economy. “As long as other important export markets like the U.S., Great Britain, Eastern Europe or the euro zone continue to grow, Germany’s exports will remain robust,” he said.

The German Federal Statistical Office reported on Tuesday that the German economy grew by 0.4 percent in the second quarter. The most important driver of growth was, once again, exports. But consumer spending also increased, while investments dwindled noticeably, according to the statistics office.

“We’re on track,” said Mr. Gabriel’s chief economist, Jeromin Zettelmeyer. “Our forecasts were already cautious but they’re realistic, as is shown now.”

The government is expecting 1.8 percent growth for this and the coming year. It will review its forecast at the beginning of October.

The German economy has profited from the low price of oil, the weak euro and rising income. Above all, the big increase in wages has led to higher tax and contribution revenues. In the first six months, Germany’s budget surplus reached €21.1 billion, or $24.07 billion.

The federal government accounted for half of it. Alongside healthy tax revenues and low interest rates, it profited from the sale of cell phone frequency bands in June, which brought in €4.4 billion. The federal states took in €2.6 billion in surplus; their balance improved by €3.3 billion compared with the same period last year.

The municipalities and the social-benefits funds also moved into the black in the first half year – despite many gloomy predictions. The Federal Statistical Office estimates that despite the high costs caused by the refugee influx from abroad, the municipalities’ surplus amounted to €4.2 billion. Social-security funds booked a positive of €3.7 billion; the office didn’t provide a breakdown according to sector.

The German Economy-01

German economists say China’s biggest economic problem isn’t the stock market turbulence.

“The government should send a clear message that they will remain on their course of reform with the goal of shifting the country’s focus from investment and exports to an economic structure orientated more strongly toward the domestic market,” said Sandra Heep of the Mercator Institute for China Studies. Although this goal cannot be reached without problems, “it is the only possibility to restore confidence in China’s economy,” she added.

Marcel Fratzscher of the German Institute for Economic Research praised China’s decision to cut its base interest rate on Tuesday. “It is a good measure because it ensures further granting of credit to the real economy,” he said. “The attempt is being made to mitigate the weakening of growth and that is certainly correct.”

A cooling down to less than 6 percent growth is expected. Mr. Fratzscher said he saw the collapse of the stock market as an adjustment reaction to speculative investments. The stock markets in China, he noted, are small compared to the economy’s size.

Clemens Fuest, of the Center for European Economic Research, recommended patience. The transformation of the economy to a consumer orientation “won’t succeed overnight,” he said.

“The government could take a look perhaps at which infrastructure projects would be most likely to provide economic stimulation and then implement them with the highest priority.”

Philipp Hauber at the Kiel Institute for the World Economy said the Chinese government now knows it can’t control the financial markets. “Naturally, classic stimulus programs would stimulate activity for a short time,” he said. “But one shouldn’t forget that part of China’s problems – the sharp increase in debt, overcapacities and real estate prices – are also the result of past fiscal policy stimuli.”

Like Ms. Heep, he recommended that the government keep to its financial market reforms. Then foreign capital will again be flowing into the country.

The economists are also in agreement that the big China boom is coming to an end. The experts don’t think the weak economic growth will lead to a political change. This, however, is exactly what Michael Hüther of the employer-friendly Cologne Institute for Economic Research is urging.

“The next steps in development necessary to entrepreneurial innovations can only be based on a broad, responsible society; economic freedom alone is simply no longer enough,” he said.


Axel Schrinner writes about tax and finance policy for Handelsblatt. Donata Riedel covers economic policy for Handelsblatt. To contact the authors:;

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