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Bill Jamieson Good for some
COMMENT
BILLJAMIESON | Executive Editor of The Scotsman
Good for some
Why Germany has boomed amid the euro crisis.
Many questions have come to the fore in the aftermath of the Greek debt crisis and eurozone summit agreement earlier this summer. Will the deal last? Does it accelerate the movement towards a common fiscal policy? And what chance do the stricken economies of Greece, Ireland, Portugal and Spain have of generating economic growth strong enough to avoid a further bail-out and yet more agony for taxpayers in the northern euro bloc?
Good questions all. But the one that is particularly haunting for the UK business sector and in particular those in manufacturing is how Germany’s industrial base is continuing to hold up. How has it achieved this? And what lessons might we learn?
Amid arguably the most de-stabilising conditions for business confidence since the European single currency came into being, Germany continues to enjoy a remarkable boom. Its economy grew by 1.5 per cent in the first quarter – and a stunning 4.9 over one of the most difficult and traumatic 12 months for the eurozone as a whole.
Recent figures show that the German labour market continued to show resilience into the summer with the number of unemployed falling for the 25th month in a row. The total fell by 11,000 in July to 2.95 million or seven per cent of the workforce – remarkably low by eurozone standards.
Total domestic employment rose by 36,000 to reach almost 41 million, while vacancies rose yet again, this time by 3000 to 464,000. Employment subject to full social security payments (a proxy for full-time as opposed to part-time employment) continued to rise at a healthy pace, showing an 86,000 gain while short-shift jobs – which rose rapidly during the onset of the financial crisis – fell below 100,000 for the first time since 2008.
In total, around 550,000 jobs have been created in the German economy since June 2009. Consequently, German consumer confidence is around record highs. However, a note of caution is needed here: while the overall dynamics remain strong, the recent pace of new hiring has slowed in recent months.
Because of this firm employment growth, German purchasing and manufacturing indices (PMIs) for both the manufacturing and services sector continue to suggest that the expansion of the German economy continued in the second quarter of this year. It may not be the stunning growth pace notched up in the first quarter, but a growth rate of around 0.5 per cent in the April-June quarter
can fairly be viewed as an achievement given the turmoil over Greek sovereign debt and the knock-on effects on business confidence.
Despite the worries, the Ifo business climate and expectations index both suggest that the German corporate sector has remained relatively upbeat. German firms are reported to be planning on spending record amounts on capital expenditure and investment in the coming 12 months. So it would not be unreasonable to expect the German labour market will continue to improve in coming months.
Domestic demand
How has this happened? In contrast to the accusations from neighbours that German consumers are a stingy bunch, saving far too much and not doing their bit to promote recovery, this growth has been underpinned by strong domestic demand. German retail sales in June surged 6.3 per cent month on month, well above consensus expectations. Private consumption is now forecast by Barclays Capital to expand by 1.5 per cent year-on-year this year and by 1.5 per cent in 2012.
Certainly the fall in the euro due to concerns over sovereign debt in peripheral countries such as Greece, Ireland and Portugal provided the conditions for a boost in German exports. But the growth base has broadened, with domestic investment and consumption becoming increasingly supportive.
Germany has prospered while much of the rest of the eurozone has been in turmoil. Recent data released by the European Commission showed eurozone consumer confidence falling in July as weak fundamentals in countries involved in the sovereign debt crisis hit confidence. Consumer confidence fell from minus 9.7 in June to minus11.6 in July – the lowest level for three months.
Business sentiment in the eurozone also declined for the fifth consecutive month, with slowing growth in order books dampening output expectations in the immediate months ahead. The business sentiment indicator fell to the lowest level since June 2010. General economic conditions are described as challenging in the eurozone as a whole for business and consumers, with unemployment in May stubbornly high at 9.9 per cent whilst retail sales volumes were down 1.9 per cent year-on-year.
Might the euro crisis have helped Germany? Most certainly yes – and here’s the secret: according to Anthony Doyle, specialist at UK investment house M&G, without the euro the German Deutschmark would now be the strongest currency in the world, German bonds would be sporting negative yields, and the German economy would probably be in recession! n
