Consumption in Germany

In comments here, Edward has addressed a question I was also thinking about this morning. He writes, “So the new coalition’s ‘play’ will be to try and really push-start domestic consumption in 2006. Obviously they hope some consumption will be brought forward in order to avoid the tax.”

Tax and a positive contribution from the ECB are important, of course, but I wonder if there aren’t other hindrances to domestic consumption. I’d be hard pressed to think of an upswing in the German economy that wasn’t led by exports and fed by investment. Domestic consumption brings up the rear.

Add to that strong admonitions in the culture that consumption is bad. Look at any apartment building and count the number of “No ads please” stickers on mail slots. Add in the Öko (“ecological”) position that the best contribution to the environment is to consume as little as possible. Add deep cultural mistrust of credit. Add some of the demographic trends that Edward has written about in detail. All of these suggest that there are barriers to a recovery sustained by domestic demand that go beyond fear of the taxman.

Or I could be wrong. Americans, after all, have famously overthrown their Puritan heritage and consume enough to keep the world economy afloat. The hard-core economists could be right, and culture might play no role at all in household decisions. I honestly don’t know what to think about German consumption. Further thoughts, anyone?

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About Doug Merrill

Freelance journalist based in Tbilisi, following stints in Atlanta, Budapest, Munich, Warsaw and Washington. Worked for a German think tank, discovered it was incompatible with repaying US student loans. Spent two years in financial markets. Bicycled from Vilnius to Tallinn. Climbed highest mountains in two Alpine countries (the easy ones, though). American center-left, with strong yellow dog tendencies. Arrived in the Caucasus two weeks before its latest war.

34 thoughts on “Consumption in Germany

  1. Add to that strong admonitions in the culture that consumption is bad.

    Do you have any reason to believe this inhibition is stronger than in eg. the Netherlands, Switzerland or Britain?

    Add in the Öko (“ecological”) position that the best contribution to the environment is to consume as little as possible.

    That movement is not waning, but no longer growing either.

    The new tax changes make a recovery based on housing impossible, probably forever. On the other hand, durable goods are not eternal. Sooner or later cars and household appliances will have to be replaced.
    On the third hand, Germany has no beaches on the Adriatic. Increasing consumption will mean increased tourism.

  2. “The hard-core economists could be right”

    Yep, well I think it depends on which hard core economists you talk to, since the number of ‘sceptics’ must now be growing daily.

    I have been maintaining a polite conversation with Brad Setser about this for some time now, and really I was set in motion on this again by his last wry comment to the effect that:

    “And I continue to be impressed by the fact that structural reform in germany seems to have recreated the German export machine, not spurred domestic demand …”

    I think this is now more of a political hope than anything else, and when I say that if it doesn’t work then 2007 will really be an ‘interesting’ year (in the Chinese curse sense) I mean it, since Germany is effectively digging a hole in 2007 domestic demand. If you add to this the fact that China and the US may well start slowing down in 2007, and the export world may get more difficult, then you can see just how interesting ‘interesting’ might be.

    Of course, I would be the last one to deny that cultural factors are important, and I take the points you make, but remember, if people are worried that their whole pension entitlement might be placed in jeopardy at some point, then even the most consumer-minded among you is hardly going to throw caution to the wind and order on credit that lovely little private jet they always fancied, at least not just now they aren’t.

  3. “Do you have any reason to believe this inhibition is stronger than in eg. the Netherlands, Switzerland or Britain?”

    Well look at the levels of private indebtedness in the UK, this might give you some idea.

    “cars and household appliances will have to be replaced.”

    Yes, but to some extent this is tied to new home formation, and if you have a lower than normal level of young people just setting up homes, and if difficult times mean that those that there are put off becoming independent another couple of years (this is called a tempo effect) then there are reasons to believe that this replacement rate will remain well below historic norms.

  4. Well look at the levels of private indebtedness in the UK, this might give you some idea.

    It does. The main idea is that unemployment in the UK is lower ;-). A lower median age might help, too.
    Is there any data on income/age distribution in Europe?

    if you have a lower than normal level of young people just setting up homes, and if difficult times mean that those that there are put off becoming independent another couple of years

    These times went up many years ago. In recent times the state governments have cut school terms and the draft is shortening, too. The reforms of social security have made setting up an independent household more attractive, as rent is subsidised. Although that might be restricted for people under 25 now.

  5. On a related thought, what would be the effect of calling off the VAT change in the summer of 2006?

  6. “On a related thought, what would be the effect of calling off the VAT change in the summer of 2006?”

    Smoother and relatively higher domestic consumption across 2006 and 2007 I would have thought. But then the deficit problem grows, so you either have to cut back on health spending (or something similarly unpleasant) or see the budget deficit continue and begin to risk getting downgrades from Moodys or Standard and Poors. No easy answers I’m afraid.

  7. Well, year you have it, hot from the press at NTC research (to me all of this was always obvious):

    Ifo survey signals fall in German business confidence

    24-Nov-05 10:52:25

    German business confidence fell in November, following two consecutive large rises, according to the latest survey from the Ifo research institute.

    Its business climate index fell to 97.8 from an upwardly revised 98.8 in October (a five year high).

    The decline in the index reflected falls in both the current and future expectations components.

    Retailers were more pessimistic about the future, with the retail confidence index showing a sharp drop.

    In a statement, Ifo claimed that despite the fall in the overall index, it still pointed to a moderate pace of economic recovery in Germany.

  8. “Americans, after all, have famously overthrown their Puritan heritage and consume enough to keep the world economy afloat.”

    At what price?

  9. those that there are put off becoming independent another couple of years (this is called a tempo effect)

    Although efforts and incentives to shorten the time Germans spend at university could be a countervailing force for at least part of the population. On the other hand, it’s still not completely clear that companies are taking the German B.A. seriously at hiring time. If they keep holding out for the Doktortitel, then young Germans will stay in school just as long, and household formation will stay just as late. Over to you, Herr Mittelstand.

  10. The Americans were already known as spenders in the 1880’s. They have lost that Puritan heritage a very long time ago

  11. If the problem is that a booming German export market is failing to translate into increased consumer confidence, then we might look in either of two directions:

    (1) Export income is failing to make it into Fritz Verbraucher’s pocket. Something is blocking cash flow from the German firm to the German household. If this is the case, labor market reforms might help. Taxing corporate income to maintain social spending might help.

    (2) Back in the days of the DM, an export boom would naturally have boosted the buying power of the German consumer through a stronger currency. Today, that isn’t necessarily true; if Germany has strong exports, but the Eurozone as a whole does not, strong German exports don’t increase the buying power of the German consumer for imported goods. Not much I can think of to do about this.

  12. Export income is failing to make it into Fritz Verbraucher’s pocket. Something is blocking cash flow from the German firm to the German household. If this is the case, labor market reforms might help. Taxing corporate income to maintain social spending might help.

    It doesn’t turn into employment. Wages are stagnant but not falling. Savings are up. The money is there, it is not spent.

    However, I am not convinced this is cultural. Remember that in the early 90es Germany had a consumer spending causing a trade deficit.

  13. “Back in the days of the DM, an export boom would naturally have boosted the buying power of the German consumer through a stronger currency.”

    This is a very important point Robert. Normally, standard economic theory would suggest that those economies with a current account surplus see their currency rising, and those with a deficit see it falling. However the world we have now, while not being flat, is definitely out of alignment.

    Japan and Germany have CA surpluses and their currencies are depreciating, while the US has a large ongoing deficit and the dollar is rising.

    Something is fishy isn’t it. The big question is, what?

  14. “So the new coalition’s ’play’ will be to try and really push-start domestic consumption in 2006. Obviously they hope some consumption will be brought forward in order to avoid the tax.”

    OMG. Is there REALLY somebody who is serious about such a crazy idea? (Wy it’s crazy: 1. it can’t work because of rational expectations; 2. even if it worked, there would be a deep recession right after the tax would have been raised. Silly.)

    German households rationally expect that the welfare state is slowly but surely coming to an end, and save money for the bad times ahead. It’s so simple.

  15. German households rationally expect that the welfare state is slowly but surely coming to an end, and save money for the bad times ahead.

    Therefore it is stupid to lessen the pain by drawing out the cuts.

  16. “Is there REALLY somebody who is serious about such a crazy idea?”

    This is a side issue really, but the Japanese – who have very similar problems to the Germans – have already tried this several times, and yes, of course it always fails. That doesn’t stop them wanting to have another go soon though. The FT yesterday:

    “Japan’s core consumer prices stopped falling in October, raising expectations that the world’s second-biggest economy may be on the verge of hauling itself from more than seven years of damaging deflation….. Instead of celebrating, politicians lined up to remind the Bank of Japan that it was too early to declare deflation dead or to ditch its super-loose monetary policy.”

    “Heizo Takenaka, the powerful internal affairs minister, told the central bank it should set monetary policy in conjunction with the government. In a repeat of stern remarks made by another senior politician this month, he warned the BoJ that its independence could be stripped away if it tightened policy prematurely.”

    The main opposition to ending monetary loosening is, of course, coming from the Ministry of Finance, who again want to raise consumption taxes (well its not that they want to, they need to for deficit reasons, also of course raising interest rates raises what you have to pay on your borrowing).

    The two situations couldn’t be more similar, IMHO. Oh, and don’t miss: now the oil spike is passing the Federal Statistical Office informed us Friday that CPI in Germany actuall *fell* between October and November as oil prices pulled back from peaks.

    http://www.destatis.de/e_home.htm

    “households rationally expect”

    Well whether or not households are fully rational in their behaviour (following Occam’s advice I tend to try and not multiply entities when I don’t need to), they certainly do expect:

    1/ More employment insecurity.
    2/ Less welfare benefits.
    3/ To live longer (ie more years after they stop working).
    4/ Possibly lower levels of return on savings, as the ‘savings glut’ (or investment dearth) effect of having so many people saving hard generates.

    All of this is going to increase saving, the thing is this is – ex US – a general phenomenon in the OECD (Germany and Japan are simply the early arrivers, the rest are about to follow, to greater or lesser degree), and it is this that is producing the so-called global imbalances, so its not something to take lightly Pavel.

  17. have already tried this several times, and yes, of course it always fails

    It still might fail in the upper house. It needs just one defection.

    as oil prices pulled back from peaks

    Cuts in subsidies are more than negating the effect and natural gas is still hurting.

    Possibly lower levels of return on savings, as the ‘savings glut’

    Is there such a thing on the global scale?

  18. Last week’s Die Zeit characterises Red-Green’s message thus: “you must take on more responsibility for yourself and also spend as much money as possible – a sort of Keynesian austerity policy” – also has Merkel saying that the expectation of future tax increases will lead to more consumption now.

    Which is either clever or completely batshit. I’m trying to work out which.

  19. “also has Merkel saying that the expectation of future tax increases will lead to more consumption now.”

    You see Alex, I’m clarvoyant, I knew this even before she said it :). It isn’t bats**t, but it isn’t sound economics either, since it assumes that something which has been evolving for ten years is a ‘temporary’, transitient phenomenon.

    If Germany were simply in the middle of a normal, short-term recession then it might well work.

    “Is there such a thing on the global scale?”

    Well this is what the big debate is about Oliver. Ben Bernanke (the new fed chairman) started it off with a famous speech with this title. Then people started saying it was an investment dearth (which in my book amounts to saying something vaguely similar). Whatever the way you put it, global returns are incredibly low (in terms of long term interest rates), so much so that Alan Greenspan describes it as a ‘mystery’.

    Of course, the big fear is that this will push pension funds etc into riskier assets, and that your private pension could end in tears, or at least being converted into an inferior state one.

  20. Re credit, I suspect there is less cultural mistrust of it in the population than rather the hard constraints of the EU not printing the world’s reserve & oil currency, and actually having to export in order to lend its currency credibility. Credit is very hard to obtain in Germany, but not for a lack of wanting on consumers’/small business owners’ part.

    Re limited consumption, scarcity of credit tends to increase the value of money in the consumers’ view (hey, if you can load up another credit card or take out a HELOC any day, that makes it so much easier to part with your cash, no?). Hence correspondingly more focus on getting “value” for your money. Another aspect of this is lower inflation/price stability, but OTOH also wage stability. Yet another parameter is due to a higher social insurance component in prices and higher environmental standards/taxes, goods prices tend to be relatively higher in Germany. Not sure how much higher store rents due to scarcer real estate comes into the picture.

    Based on my empirical comparison of living in urban Germany vs. the suburban US, the physical act of shopping is also that much less enjoyable, and more costly and time-consuming (in Germany):

    * in Europe everything is much more compact, including stores, and higher population density makes for more heads per crowded store

    * shorter store opening hours in Germany (meanwhile somewhat relieved)

    * limited/nonexisting parking, and/or parking fees; you can use public transit to get to stores in cities, but this increases the time it takes to shop, and reduces flexibility in moving around, plus you get to carry your purchases through stores, crowded transit vehicles, and home in your hand; bottom line, fewer store visits per shopping trip

    * the purpose of life in the US is to work/make a career, and to shop while not working, Germany is not quite there yet (that’s of course a cultural factor)

  21. Also quite importantly, higher fuel prices/taxes in Germany. This goes into goods prices as well as transportation cost to/from stores.

  22. I have 2 nephews who live in Germany, both have college degrees and neither can find a job. They’re late 20’s, here in the US, they’d be marrying and buying homes. In Germany, they cannot aford to do either. What happens to college educated people who cannot find employment? A lifetime of welfare? One of them finally got a job at McDonald’s and felt lucky to have it.

  23. The main problem of Germans is that they are too much materialistic, greedy and they have not enough children.

  24. All these ‘culturalist’ explanations are fine and very interesting. But I wouldn’t mind someone telling me just what the similarities are between the Geramns and the Japanese in this sense. In the FT this morning (monday):

    “Japan’s “Warm Biz” campaign, which should have boosted the sale of warm winter clothes, has failed to catch the imagination of consumers. Retail sales in October were down 0.3 per cent on the year – the first annual fall in eight months. The news prompted the Ministry of Economy, Trade and Industry, which published the figures on Monday, to downgrade its view on retail spending. An official was quoted by Reuters as saying on Monday that retail sales were flattening, toning down the Ministry’s view in the second quarter that sales were recovering moderately.”

    So both countries cannot sustain consumption growth, both have impressively competitive global corporations, and both have significant balance of payments surpluses.

    As far as I can see the main thing these two countries have in common is their median age: 42. They are the oldest societies on the planet.

  25. Edward: What about my credit scarcity argument? That should hold for most of Europe, and if I’m not mistaken also Japan. That’s not to say cultural issues play no role (both Japan and Germany being WW2 losers, and being exposed to turmoil prior to that). And most continental European nations were WW2 losers in one way or the other, and also went through turmoil earlier.

    But when it comes to (debt-fueled) consumption, that’s mostly the US, and a few oil suppliers attached to it. And to an extent & reason unknown to me the UK. Euro nations have to maintain a reasonable trade balance, and any siphoning off of funds by a US-imitating business top echelon takes purchasing power out of the general population which cannot replaced by credit as in the US (as Europe cannot simply print that much more money).

  26. “Edward: What about my credit….”

    Ok sorry cm, and thanks for being persistent.

    “that’s mostly the US, and a few oil suppliers attached to it.”

    I don’t think it quite works. In part you answer your own question.

    “And to an extent & reason unknown to me the UK.”

    So this is what you need to look into. Firstly you should add Spain and Ireland to your list of heavy private borrowers. Spain is in fact the US of Europe, with levels private borrowing having risen 20% y-o-y in October, a housing boom which has been burning away at a curca 20% price rise per annum for at least five years now, and a very substantial and unsustainable balance of trade deficit.

    And France is in the middle, it isn’t the UK or Spain, but it isn’t Germany or Italy either.

    “as Europe cannot simply print that much more money”

    Actually Europe is printing money at a hell of a rate, M3 is rising well above target (the US Fed has of course wisely recently abandoned tracking M3), it’s just that the Germans don’t want to use it.

    You will find here a list of countries classified by median age and fertility.

    http://www.edwardhugh.net/medianage.html

    It’s only a rule of thumb guide, but it works reasonably well. You have to remember that age isn’t the only factor here, there are ‘distortions’ produced by the one size fits all eurozone monetary policy too, and the ccatching-up effect in the new EU accession members.

    My guess is there is a break point around Spain. As you go up, the more the weight of saving is likely to impact on the domestic economy. The group in the middle should more or less borrow significantly – it would be interesting to see what happens eg in Poland. Then when you get down to China again there is a break, more saving than consumption. It will be interesting to see whether, as China’s median age enters the 35 to 35 range domestic consumption takes off we should also look closely at Thailand, Brazil and Turkey as they ‘age’. I would expect consumer credit-driven growth to take off in all of these, but it will be an interesting test for my theory. Remember the younger Japan (80s) had a huge borrowing binge.

    There is some reasonably respectable economic theory to back all this up: Modilgliani’s life-cycle theory of saving.

    You see, when you say: “Germany is not quite there yet”, my feeling is that its over the hill already.

    Basically, there is nothing to fear from life expectancy increasing, essentially its great, what really matters is the rate, and whether our cognitive and other abilities extend upwards at the same rate. This is where fertility has a part to play, since I think the break in the population pyramid in Germany means that average ages are rising much more quickly than our age-related productive capacities are.

  27. Going back to Alex’s point as to whether or not this was ‘clever’ or not, the latest consumer survey today was pretty much a foregone conclusion as far as I was concerned:

    “Consumer confidence in Germany, Europe’s largest economy, fell for a second month in three as Chancellor Angela Merkel’s government decided to raise sales tax.

    “GfK’s confidence index, based on a November survey of about 2,000 people that aims to forecast household spending one month ahead, fell to 3.1 from last month’s revised 3.3 reading, the Nuremberg-based market-research company said in an e-mailed statement today. GfK reiterated its forecast that private consumption won’t increase more than 0.2 percent this year.”

    http://quote.bloomberg.com/apps/news?pid=10000085&sid=achIRkWULgho&refer=news_index

  28. This is just an idea (i.e., I neither have nor know how to get the numbers I’d need to back it up), but what about productivity of the retail sector? If (for whatever reasons), it costs more to sell goods to German and Japanese consumers than to British, Irish, and American consumers, then Germans consume less because everything is more expensive.

    And this is where cultural differences might kick in … if country A has a strong consumer culture, and country B does not, country A is the market for the designers of consumer goods. There is less incentive to design goods with cultural appeal to country B.

  29. Edward: When I said “Germany is not there yet”, I specifically meant that the younger (post-WW2?) generations do not strike me as having many inhibitions against shopping and conspicuous consumption, and their consumption is limited by credit scarcity.

    And I must confess I don’t know much about the rest of Europe, and there more of the central part than the far West. I’m surprised that the stability pact allows that much profligacy. OTOH if it is supported by “real growth” …

  30. “I specifically meant that the younger…. generations do not strike me as having many inhibitions against shopping and conspicuous consumption”

    I’m happy to accept they haven’t. I haven’t been arguing they have, that was other people. My argument is just that, for demographic reasons, there are less of them, proportionately, and that the next generation will have even less of them: that’s what having a fertility level of 1.3 means in practice, and so on and so on.

    The difference between having consumption growing at 1% per annum and declining at 1% per annum isn’t that huge at the end of the day, but the difference does seem to have quite important implications.

  31. the US Fed has of course wisely recently abandoned tracking M3

    Uhm, the Fed has stopped publishing the data but it still tracks it.

  32. “Uhm, the Fed has stopped publishing the data but it still tracks it.”

    Are you sure? I am happy to stand corrected. My source on this was Dave Altig of MacroBlog (and he works for the Fed).

    “Let me be very clear — I speak only for myself here. The data collection function is a role that is delegated to the Board of Governors, and only they are in a position to comment on the whys and hows of the decision to discontinue collecting the data that makes up the M3 aggregate.”

    http://macroblog.typepad.com/macroblog/2005/11/much_ado_about_.html

    I had understood Dave’s argument as being that data collection has a cost, and that if the end result has little economic relevance then why bother. But I – or he may have been wrong.

  33. I tried to get data on the “Germans consume less because everything is more expensive” idea, and all I found was http://www.destatis.de/basis/d/ausl/auslkkr1.php, which seems to suggest that one Euro buys more in Germany than it (or its equivalent) does in most other developed countries.

    Does anyone here have further insight into this?

  34. Comparing the average German euro to the price levels in EU countries’ capitols is hardly fair.

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