Could There Really Be A Recession Risk In Germany?

Oh, come on Edward, surely this time you are going too far? The Germany economy is the strongest in Europe, time and again we have been told it is powering and powering ahead. It has just demonstrated record growth performances. So where the hell could you possibly get the crazy idea that Germany might be in for a double-dip recession? Must be the summer Spanish heat.

Well, no. Perhaps the idea is not as absurd as it seems at first sight. Try taking a look at this chart (exhibit A), for starters. This is what just happened to German manufacturing industry.

It is the monthly manufacturing PMI chart, and note the sharp smooth downward line, which stretches from February’s high point of 62.7, down to July’s 52. Yes, German manufacturing industry is still expanding, but only just, and it is the pace of the slowdown which is remarkable.

And this months report made plain there is worse to come, since as Tim Moore, senior economist at Markit informed us: “New order levels went into reverse in July, as fewer export sales helped end a two-year period of sustained growth”. The report also highlighted a reduction in export sales, with the pace of contraction being the fastest since June 2009.

We can also find a reflection of what we are seeing in Germany out in East European economies like the Czech Republic, where the rate of economic expansion has also slowed sharply. This is not surprising, since these economies are all tightly roped together via the German export machine.

Well, OK, German manufacturing industry is slowing, but that’s only one part of German activity, surely the rest of the economy will have sufficient momentum to keep moving forward? We this is where I bring in what I consider to be my “killer app”, which is the fact that Germany has an export dependent economy.

In Germany movements in GDP follow movements in the rate of expansion of exports. Let’s not get into why that is for the moment (think Germany’s particular demography), and just consider the possibility, despite all the talk over the years of Germany finally “decoupling”, that it can’t. Export dependence could well be the key explantaion for why the performance of the German economy is so “extreme” and so volatile, with quarters of record growth being witnessed just before the onset of substantial recessions, recessions which often register record falls in output only to be followed by massive recoveries. The reality is not that Germany is either a growth or a contraction champion, but that export dependency simply makes the German economy more volatile and more susceptible to sudden changes than those of some of its neighbours (like France).

In fact Germany’s long term trend growth has been falling steadily.

We Can See The Slowdown Everywhere, Except In The ECB Rate Policy

But why do you insist that this won’t simply be a slow patch, or a soft spot? Even the bundesbank is saying that German growth in the second half of the year won’t be as strong as in the first half. Well, here comes exhibit B. The slowdown is global, and for an economy which needs growing exports to grow, then a global slowdown is a real problem.

Even China (that other great export driven economy) is feeling the heat, with new export orders also having slid into contraction territory.

And there are more indications than simply the PMI that the economic outlook in Germany is deteriorating. We have the IFO sentiment index, which has now entered overall decline.

And then there is the latest European Confidence Index reading:

Naturally, none of these readings are definitive, but they are what we have at this point, since data from June is hardly helpful to tell us what will happen in August, which is why we need to rely on the “softer” forward looking indicators.

And obviously I can only discern something about the situation such as it is now. Should Ben Bernanke (as I argued in this post here) decide to go ahead with another bout of quantitative easing, Germany would probably be one of the leading beneficiaries, but that is the world we might have, and not the one we actually have as of this moment. So summing up I cannot do better than Tim Moore, senior economist at Markit and author of the PMI report, who said in his final comment:

“July’s final PMI data confirmed a sharp slowdown in German private sector growth, with output levels rising at the weakest pace since the autumn of 2009. The month-on-month loss of growth momentum was also the steepest since the recovery began two years ago. New business gains meanwhile hit a stumbling block in July as heightened economic and financial market uncertainty encouraged clients to delay spending decisions. The latest overall rise in new order levels was the slowest since the start of the upturn, which in turn is likely to weigh on business confidence and job hiring in the months ahead.”

This post first appeared on my Roubini Global Econmonitor Blog “Don’t Shoot The Messenger“.

This entry was posted in A Fistful Of Euros, Economics and demography, Economics: Country briefings by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

22 thoughts on “Could There Really Be A Recession Risk In Germany?

  1. Pingback: A Risk of Recession in Germany ?? | UKIP

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  3. Edward,

    Thanks for this post. Perhaps the most important graph here is the 10-year moving average of German GDP growth. You are too polite to say so, but it seriously challenges the argument that other European countries should follow Germany’s example.

    Itt would be quite instructive to plot the same data for the other European countries.

  4. The long-term problem Germany has for economic growth is an ageing and declining population, essentially ‘Japan syndrome’. Unfortunately much of Europe is heading for the same demographic future at the moment. (Exceptions: France, UK, Ireland, Nordics, Turkey if you count it as Europe, maybe Benelux, maybe Spain.)

  5. Is that really worth any news? Of course, Germany will have a recession if Europe and the US are having one and Asia slows.

    @Perplexed in Montreal
    It also goes to show that the “Germany benefits most from the Euro” talk is rubbish.

  6. GS,

    We would need to wait for Edward to plot the same graph for the other countries to decide about that ;)

    With the removal of periodic D-mark reevaluation, Germany has vastly benefited of what amounts to a undervalued currency wrt the rest of the eurozone.

    However a few years ago everybody agreed that Spain, Italy, Greece, Ireland & Portugal benefited the most from the euro as it greatly decreased their interest rates.

    So ‘benefiting from the euro’ seems a temporary and dangerous place to be.

  7. Of course, net-exporter Germany is at risk of a recession.
    How else will the German surplus come down to allow for its trading partners to cut their deficits?

  8. Germany is not immune from problems in Europe because the EU is its major trading partner. Moreover, German banks have significant exposure to Italy/Spain debt, which at the moment, look like they are headed towards an unsustainable debt path. Data on German exposure here…

    goo.gl/wNCUs

  9. @MiP
    It would surely be very interesting if Edward was providing the same data for every country. But for a start, you could compare the relative position of West European countries in terms of GDP per capita. In the 1990s Germany was one of the richest countries in Western Europe. By the onset of the current crisis Germany found itself in the bottom half of the GDP/capita table. It is true that it has climbed a little bit again since 2009 but that’s mostly to the fact that many countries haven’t reached their 2008 GDP level yet, i.e. more because of their weakness than Germany’s perceived strength.

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  11. Sorry Mr, doom and gloom Hughs, this time, theres not much contrarian about the post. Were very aware here in Germany that were anythin but immume, that a lot of our growth depends on an export boom with doubtfull sustainability is pretty much conventional wisdom (which i agree with).

    To get some excitement, id recommend pushing the sky will falling due to low birthrares line instead . This one works for me (work in the sense that i think its wrong and that it anoys me trigering an emotional response).

    Anyway, doom and gloom is very fashionable again now that the stock markets tanked a bit, id recommend to double down, not such a lame ass almost optimistic post :-).

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  13. Pingback: Noua recesiune şi tiparniţele de bani. Bătăiosu: Investiţi în pământ arabil şi animale, cumpăraţi-vă unelte simple, ne-mecanizate, obişnuiţi-vă cu traiul simplu, că vremea huzurului şi risipei a trecut. Bogat va fi cel care va avea ce pun

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  16. Well, yes. Playing the old game. Didn’t you predict a double dip recession back in late 2009 and early 2010 in Germany? And never conceded that you were wrong?

    And that demographics obsession: Germany has been a export dependent economy since the fifties. So your explanation is hardly convincing.

    And the harking on the fact that Germany had a slower growth then, say, Ireland or Spain back in 2005 or so. very questionable from the facts we know now.

  17. Hi IM,

    “Well, yes. Playing the old game. Didn’t you predict a double dip recession back in late 2009 and early 2010 in Germany? And never conceded that you were wrong?”

    Thanks for reminding me of this. You are absolutely right. The problem is that the German economy is so volatile. One minute it’s up in the air, then its down on the floor, then its up in the air again. Maybe we shouldn’t worry about this, although I for one can’t bring myself to find it normal.

    I think the thing I missed back in late 2009 (and again in the summer of 2010) was the impact of the various QEs in the US on emerging market growth. Plus, of course, the ludicrous lending surge in China, and the fact that the high value of the yen virtually pushed Japan out of the race (long before the tsunami hit). This time I have learnt my lesson, and have qualified if you look at the post carefully: if Bernanke hits the QE3 button, then evidently the double dip won’t be, although I do think next time round the bang for the buck will be a lot less, and when it wears off, well we will probably be back to recession time anyway, since in this brave new world we have entered expansions are likely to be of shorter duration than they were before the crisis.

    “Germany has been a export dependent economy since the fifties”.

    Not uninteruptedly if you look at the data. During the 1990s Germany had a post reunification consumption boom, and ran a current account deficit. The interesting thing about what you call my demographic obsession is that if I do turn out to be right one thing is for sure: it will be far too late to do anything about the problem, and the die will be cast.

    Maybe Germany will have a recession in the second half of this year, and maybe it won’t, but one thing is for sure: the German economy is decelerating rapidly at this point in time.

  18. Well IM,

    As an avid follower and unofficial scorecard marker for my blog predictions, I guess you will have seen this:

    “The momentum with which the German economy started into 2011 has slowed down considerably. In the second quarter of 2011, the gross domestic product (GDP) rose just 0.1% – upon price, seasonal and calendar adjustment – on the first quarter, as reported by the Federal Statistical Office (Destatis). The result for the first quarter of 2011 was slightly corrected downwards to +1.3%.”

    Just like any other human being I don’t always get things right, but so far I haven’t gotten this one wrong. And the basic point stands: the volatility in German growth.

  19. Germany was an export-dependent economy in the 1920s and 1930s, too. And before the first world war. They didn’t come up with all those theories of economic geopolitics out of pure intellectual caprice.

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