Financial Time February 2013

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Germany’s economy Unlike some of its neighbours, Germany is slowing rather than melting down

MUCH of Europe has pneumonia. How is that affecting Germany, the continent’s biggest economy? Exports are surprisingly buoyant considering the European pandemonium; they rose by 0.9% in September. But industrial production dropped by 2.7% in September and new orders, a harbinger of future output, fell by 4.3%, the third monthly decline in a row.

Business is bracing for harder times. Expectations have been falling since February, according to the Ifo Business Survey. The biggest problem is the euro crisis, which is playing havoc with Germany’s trading partners. Industrial orders from the euro zone plunged by 12.1% in September. Demand will also wane from Asia and eastern Europe, which have been Germany’s fastest-growing markets. Exports make up around half of the country’s GDP, so a slowdown is inevitable. On November 9th the government’s advisory council of economic “wise men” predicted that growth would shrink from 3% this year to 0.9% in 2012. They expect near-stagnation until the middle of 2012. Some pundits think the economy will shrink.

This may look like poetic justice to peripheral euro-zone countries, which are suffering partly because Germany demands austerity in return for aid. But there are no grounds for Schadenfreude. First, German strength has helped them; they will fare worse if Germany falters. Second, Germany is still in pretty good shape.

Germany’s economy is often more volatile than that of neighbours like France. Its specialisation in investment goods, cars and other expensive consumer products makes the upswings higher but downturns sharper. That pattern may now be broken. As Europe slides, Germany is likely to sink less than the others. But this rests on a hope: that European leaders - the German chancellor, Angela Merkel, in particular—will stop mismanaging the euro crisis.

Germany’s trump card is its labour market. Unemployment barely rose during the 2008-09 recession. With the recovery, it has dropped to a 20-year low. After years of sacrifice, wage-earners are starting to profit. Gross wages are expected to rise by nearly 5% this year and by about 3% in 2012. Disposable income, adjusted for consumer inflation, should increase by about 1% next year. Consumption is now contributing to growth, alongside exports. “German growth is much more balanced,” says Holger Schmieding of Berenberg Bank.

Employment should remain resilient during the downturn. Earlier labour-market reforms continue to put pressure on the unemployed to find work, notes Eckart Tuchtfeld of Commerzbank. As before the last recession, employers remain “extremely reluctant to let go of skilled staff”, he says, in part because the labour force is shrinking. “Working time accounts” make it easier to avoid redundancies. These are credited when employees work extra hours and can be drawn down when activity is slack. During the last two busy years they have been replenished. The wise men expect the unemployment rate to drop from 7.1% in 2011 to 6.9% next year.

Luckily, Mrs Merkel does not plan for Germany the austerity she recommends for other countries. Mr Tuchtfeld calculates that fiscal policy will be neutral or even slightly expansionary in 2012. On November 6th the coalition sought to patch up disputes among its three quarrelsome members with a little extra spending. Starting in 2013 families that do not put their children in crèches will get €100 ($136) a month, a sop to the Christian Social Union, the Bavarian sibling of Mrs Merkel’s Christian Democratic Union. Roads will get a bit of extra cash. To placate the Free Democratic Party taxes will be cut. Tight credit is not an immediate threat: German companies have plenty of cash.

The hope is that Germany’s downturn will be short and shallow. But that depends on Europe’s leaders getting to grips with the euro crisis. Unchecked, it will shatter the confidence of consumers as well as businesses. Germany’s recession would then be as painful as anyone else’s, says Mr Schmieding. “We have more of a buffer than most, but that doesn’t protect us from everything.”

The Economist November 2011