German Exports and that Looming Double Dip

I hadn’t seen an advance release of the January German export data, when I wrote the following on Tuesday, honest injun I hadn’t:

Well, this is only a hypothesis. But if the hypothesis has any validity we should be able to make some predictions on the basis of it. I would make two. Firstly, since East Europe’s economies are often dependent for their growth on exports to the West, and in particular to Germany, then we should be able to see some “shadow” of this German process cast out into the East.

In the second place, we should see the process continue to some extent in Q1 2010. That is, based on what we have seen so far, in Q1 imports should rise, as industrial output in the early parts of the supply chain surges, and net trade should as a consequence be less positive than in Q4 2009. On the other hand, all the imported components awaiting processing should make inventories rise. So that’s a prediction. Now we need to wait and see how good it is.

I think I oulined in the post itself just how much you could see the impact of the long Eastward shadow cast by the German economy in the industrial output performance in Central Europe, but little did I expect, when I wrote those words that further confirmation of the hypothesis would come within a mere 24 hours:

Germany’s exports unexpectedly declined in January compared to the previous month, official data showed on Wednesday, highlighting risks of a bumpy recovery in Europe’s largest economy.Exports, adjusted for seasonal and calendar effects, dropped 6.3% in January compared to December 2009, the Federal Statistical Office, or Destatis, reported.

Most analysts expected a 0.5% increase in exports, which posted a monthly rise of 3.4% in December. Imports posted a monthly rise of 6% in January after gaining 5% in the previous month..

So we are seeing the imports rising effect, which suggests, since domestic consumption is falling at this point, that those inventories are starting to rise again, given that the expected follow through on exports is nothing like as dynamic as most analysts are suggesting. Oh, I know, I know, we have been having some very bad weather of late…

Axel Weber is forecasting a slight negative performance of the German economy in the first quarter, but in fact things are still not so clear since, as I wrote on Tuesday:

“Given everything I have said above about swings in imports and inventories, I would say German GDP will be very near to stationary again this quarter, with a possible slight upside depending on the inventory swing, but whatever upside we do see will more than likely disappear as quickly as it came when we get to the Q2 2010 data.”

In other words, it is all down to inventories again, and these are very difficult to foresee. Nonetheless I would make two more points:

Firstly, the Bundesbank’s forecast for growth of 1.6 percent in 2010 is looking rather optimistic at this point, even though GDP was at a very low level last year, so in theory getting some growth should not be that hard.

And secondly, that German recessionary “double dip” that I mentioned back in November does not look so implausible at all at this point. All that is needed is a very slight downward revision to the Q4 2009 data, and Axel Weber’s own prediction for very slight negative growth in this quarter to be confirmed, and there we will be, back in recession. Which would only leave us with the French economy – among the EU majors – showing any sign of a robust recovery.

Of course the implications of all this rather technical argumentation are fairly profound. In the first place, as I noted in this post, any talk of the ECB raising interest rates either this year, or in the first half of 2011, would seem to be way, way too premature. And secondly, it is becoming increasingly obvious that Europe’s (theoretically) stronger economies are inexorably yoked together with all those supposedly weaker ones, via the Eurozone (and EU27) current account imbalances.

So solving one problem also implies solving the other. Never has the case for a “united we stand, divided we fall” approach been clearer. So gentlemen, please, let’s get a note of reality back into all those deliberations about what to do with the problems being faced in countries like Latvia, Hungary, Greece and Spain. We need common solutions to common problems, and we need solutions that work.

This entry was posted in A Fistful Of Euros, Economics and demography 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".

16 thoughts on “German Exports and that Looming Double Dip

  1. “And secondly, it is becoming increasingly obvious that Europe’s (theoretically) stronger economies are inexorably yoked together with all those supposedly weaker ones, via the Eurozone (and EU27) current account imbalances.”

    Why is that obvious? Don’t you need to show that the weakening in exports has something to do especially with exports to EU and Euro countries?

    “Latvia, Hungary, Greece and Spain.”

    None of this countries are really relevant for german exports.

    France, USA, Netherlands, UK,

    are relevant. France is an euro country, but France had a mild recession. So I would guess the continuing recession in the US and UK keep german exports down.

    And a rise in german imports can not really “cast a shadow” and decrease exports in eastern europe.

    I share your general sentiment, but
    these numbers just don’t show a connection between german exports and deficits in trade accounts in other Euro and EU countries.

  2. Hello IM,

    “And secondly, it is becoming increasingly obvious that Europe’s (theoretically) stronger economies are inexorably yoked together with all those supposedly weaker ones, via the Eurozone (and EU27) current account imbalances.”

    Well I do say Eurozone and EU 27. I mean the UK is one of the current account deficit countries. The only difference is that the UK is not in the Euro, and thus can devalue its currency – although this evidently doesn’t help German exports. The US is also correcting a ca deficit, and I wouldn’t expect too much growth on that front any time soon either.

    But I do think you may be underestimating the importance of exports to Southern and Eastern Europe a bit. They are not the most important customers, but their absence is being noted.

    On the other hand this wasn’t really the main point I was making, and indeed I agree that in this post I haven’t demonstrated anything in this regard.

    “And a rise in german imports can not really “cast a shadow” and decrease exports in eastern europe.”

    No, it’s the other way round, a rise in German imports (for assembly and re export) drives the machinery in factories in Hungary, the Czech Republic and Poland, but a REDUCTION in imports, which is what comes next, is what leaves part of those same factories lying idle.

  3. Isn’t it a bit odd that we’re talking about non Euro-area countries and their currencies in the context of weakening German exports?

    Haven’t we heard for years that the purpose of the Euro was to free the EU from the torment and uncertainty of currency exchange rate changes?

  4. A very interesting post. I would like to have your comments on a related issue. The blogosphese seems to assume that Germany has been pursuing a beggar-thy-neighbour policy by conducting a wage devaluation since the apparition of the euro, with this policy generating a huge desequilibrium by (a) making Germany over competitive wrt most of the rest of the Euroland — thus boosting exports — and (b) depressing internal demand — thus depressing imports. This has the logic of truth, but the aging and stagnation of German population probably also has a very strong depressing effect on internal demand. French demography is quite dynamic, and internal demand just follows. What would have been the evolution of French internal demand in the last 10 years if the demographic profile had been the same than Germany? In your opinion, what are the respective contributions of volontary competitive policy and of involuntary demographic shrinkage in the stagnation of German internal demand?
    It would be very difficult to convince Germany to revert its internal devaluation policy. But that might prove infinitely easier compared to changing Germany demographic profile.
    On another trade issue, I would like you to comment on the bizarre non-effect of the violent pound devaluation on British trade balance. Brit commentators come with an array of explanations (including bad weather), but 1 year ago they were absolutely sure that the devaluation would work its magic, so I am looking for a second advice.

  5. Hello Perplexed,

    “The blogosphese seems to assume that Germany has been pursuing a beggar-thy-neighbour policy by conducting a wage devaluation since the apparition of the euro, with this policy generating a huge desequilibrium”

    Well, basically I agree with you, the blogosphere is making a very naieve assumption here. Keep your arguments simple seems to be the watchword, although the problem is that what we have is a complex problem. I’m also noticing how this argument seems to resemble the one which is so common in the US these days that China is unreasonably “manipulating” its currency to be too competitive with exports.

    What these arguments miss (and of course Japan is another case) is the underlying demographic dydnamic here. I wouldn’t like to attribute a number to how much of this problem is demographic rather than cultural/political, but it is certainly well over 50% – ie the MAIN problem is the demographic one. You try asking Germans whether their main ambition in life is to ruin people in Southern and Eastern Europe, and see what sort of answer you get.

    I just don’t accept the “mercantilism” label, whether in the case of Germany, or Japan, or China – and I think the idea that you can get “too competitive” is ludicrous.

    On the other hand all these countries have been totally irresponsible in the way they have let their population pyramids go to hell – and not listened to people in countries like Sweden or France, who were addressing the problem. How many times have we heard the “gurus” from the ECB warning France about the size of its fiscal problem, when it is German debt that looks increasingly unsustainable over the next decade if they do not have a large export surplus.

    In the Chinese case, of course, not having children has even been official policy. And no one at the highest level has even spoken to them about that, it is all treated as a “currency issue”. So in my book everyone is partly to blame.

    Basically, simple macro economics, whether Modigliani life cycle theory, or Friedman permanent income hypothesis, tells us (along with simple personal experience) that people adjust saving and borrowing across their lifetime, and population pyramids simply aggreate these patterns.

    German wages did, as I show in a chart in my last post, rise significantly in the second half of 2009, but consumption actually fell. This didn’t surprise me, it is what I expect to see. The pressure on sovereign debt (even in Germany) means that people increasingly see their future pension stream as threatened (simply Ricardian equivalence type stuff should help us see that), and hence try to improve their savings position to take that fact into account. Everyone is obsessed with what is going to happen to them when they get really old.

    And remember in China, every four urban grandparents will now have only one grandchild to support them, with very little in the way of state pension and welfare support.

    I mean, as far as I am concerned China gives the lie to Mark Stern’s argument that it is the “nanny state” that kills fertility – there is little in the way of a nanny state in China (and Singapore is a smaller and even better example).

    So, the point I want to make is that Germany itself is in a problem, and a big one. As a consequence we need to be careful on both sides of the fence here. German society is trapped in a dead end, and trapped animals can get aggresively dangerous when they feel threatened.

    So, what I am saying is, rather than getting bogged down now in who was doing what, where and when, about the stability and growth pact in 2002 (incidentally I WAS arguing way back then that all this type of thing was inevitably going to happen, and on this blog, if you check back over the posts), people might like to think more about the collective responsibility we all have in the the West for allowing such huge imbalances of wealth (at one pole) and population (at the other) to build up in the second half of the 20th century. It is these imbalances that are at the heart of all our present difficulties.

    Evidently, we can’t turn the demographic clock back 50 years, so we have to find solutions within the paramaters we currently face, but the best way to do this is to start working together … esto podemos arreglar entre todos … and stop the sort of stupid arrogant bickering that Herr Schäuble has been so instrumental in fomenting in recent days.

    And if you want more of all of this, why not come into my facebook where we have an amicable debate raging about all this, day in, day out.

  6. Perplexed,

    German “Lohnzuerueckhaltung” – abstaining even from normal wage increases and promoting real wage decreases has been the absolute cornerstone of German economic policy since 90-ies. Reasons are more psychological nature – why something like that was possible now and was not possible earlier – and it must be noted that this is generally true for lower and middle class “workers”, not elites. But due to the shear size of German “workers”, that has proven to be enormous efficient.

    In Eurozone this competitiveness together with shear size of German economy has created many German firms – anabolic champions – as described e.g. in Int Herald Tribune of 28.02.2010 – means, they are the only producer in the EU for goods where there is place for only one producing firm in the EU market in order to stay competitive also globally (scale). So Germany this way has directly caused dying of firms in other EU countries – in this particular case firms in Hungary and Finland. Due to high number of Germans in the EU bureaucracy the monopoly supervision of the EU is very insensitive to German phenomena.

    Normally, up to the recent crisis this was somewhere compensated by German transfers to EU budget, and losers could use this money for their research (as Finland) or investments into infrastructure (Hungary). Another mechanism would be opening of internal services and labour markets, which still has not occurred with respect to CEE.

    But as you correctly write, German society’s aging and health related costs increase exponentially. In addition, middle class is requiring at least a part of benefits distributed by the upper classes (FDP phenomenon). Therefore Germany under Angela is becoming more and more reluctant to redistribute funds externally, because they are so needed internally – first, for the benefits of the upper class – bank bailouts etc.

    Therefore Germany is trying to exploit Eurozone and EU imbalances to restore export income, at the same time blocking transfers to the EU. It is not a surprise that Germany has opted to switch off Structural funds for Greece.

    On the other hand, Germany is extremely dependent on the keeping free trade in the EU, because it is obvious that CEE will profit enormously by restoring customs taxation.

  7. Edward, Govs:

    Thanks for your replies. Not encouraging but, I guess, firmly anchored in facts.

  8. “German wages did, as I show in a chart in my last post, rise significantly in the second half of 2009, but consumption actually fell. This didn’t surprise me, it is what I expect to see.”

    that’s not true. Wages didn’t rise, it had to do with the way wages are calculated. In May 2009, we had 1,6 million persons on short time work (Kurzarbeit), a government funded program. That makes workers more expensive for companies, but doesn’t raise wages for workers. Actually, wages in germany fell, but I think you can’t blame germans for that. At least, the program prevented an implosion in the labor market.

    German wages fall for first time in modern history

    BERLIN, March 3 (Reuters) – Average wages in Germany fell for the first time in the country’s modern history as the economy sank into recession last year, the Federal Statistics Office said on Wednesday.

    German workers earned 27,648 euros ($37,370) on average in 2009, down 0.4 percent from 27,751 euros a year earlier, it said in a statement. This marked the first drop since the Federal Republic was founded in 1949.

    Workers in the manufacturing sector were hardest hit with per-capita income sinking 3.6 percent to 36,264 euros.

    The government office cited the increased use of government-funded part-time working programmes and a reduction in overtime as causes.

    Such ‘Kurzarbeit’ schemes have prevented unemployment from rising as sharply during the recession as had been feared.

    ‘Of course, it’s the economic crisis … It’s a reaction to the current economic situation,’ said Franz-Josef Steimer, an official at the Federal Statistical Office, told Reuters.

    By contrast, hourly wages climbed 3 percent to 21.12 euros. Hourly income in the manufacturing sector increased 4.4 percent to 27.80 euros. The increases result from workers cashing in on compensatory time, thereby working less, but earning the same income.

    Germany emerged from recession in the second quarter of 2009, but its recovery stalled in the fourth quarter. The economy contracted by a post-war record 5 percent in 2009 and unemployment has climbed slowly.

    http://www.xe.com/news/2010/03/03/988397.htm?utm_source=RSS&utm_medium=TL&utm_content=NOGEO&utm_campaign=News_RSS_Art4

    and if you want to blame someone for the wage development in germany, you should look at Mr von Sinn, the chief economist from the ifo-institute. During the last 10 years (ok, he stopped in 2007), he sounded like a broken record, constantly repeating how uncompetitive germany has become and that too high wages are to blame for the economic stagnation.

  9. Govs has an “interesting” trade theory that makes big countries profit more from freetrade than small ones.

  10. Here is the article

    http://www.nytimes.com/2010/02/27/business/global/27gcon.html?scp=1&sq=vitrines&st=cse

    Needless to say that the anabolic pattern of German company growth after 1990 is the following: expansion in the large DE Market, and following growth in EU. FPossible only because: 1) no customs tax, 2) no competitive devaluations possible.

    Outcome: CEE is competitive nowhere, except they apply competitive devaluations. No wonder CZ has postponed EUR until 2019 when the present crisis is expected to end.

  11. Edward,

    I posted in hast and can now repent in leisure. Now I have read both your posts and understand your argument better. Your observation that a drop in german exports in one quarter will cause a drop in East european exports in teh et quarter make sense. And if one adds the UK to the current account deficits countries Spain, Greece, Portugal and so on they are relevant to german exports.

    That said, the argument now popular in the press, in the article cited by govs for example, that there is a sort of accounting identity between german surpluses and the deficits of other european countries is much to primitive.

    If the substantial trade deficit between China and Germany would grow further, the german current account surplus would shrink. That is a way to balance, but that new balance would help the european deficit countries not a whit.

    On the other hand much of the trade deficits of Spain or the UK or the eastern european countries are caused by chinese, japanese, russian (Oil, Gas) imports. Rising energy prices e. g. will lead to widening of the trade deficits of eastern european countries, whatever happens to german exports.

    Govs,

    I don’t get your argument, Asthe times article shows, a lot of german companies are nice producers, specializing in some quality product and competing on quality, not price. If you are one of two or three companies worldwide, the eastern european market just doesn’t matters. Do you really think, Latvia or Poland could compete with, say, german machine tools makers just by erecting custom barriers?

    Jon,

    “Isn’t it a bit odd that we’re talking about non Euro-area countries and their currencies in the context of weakening German exports?

    Haven’t we heard for years that the purpose of the Euro was to free the EU from the torment and uncertainty of currency exchange rate changes?”

    What is odd about it? There are important german export markets, the US or China or Russia, that will ever join the Euro. And nobody claimed this back then. Another important market, the UK is not in the Euro either and I think everybody did know back then that it’s prospects joining the Euro were distant.
    So of course currency movement in the US or UK have a considerable influence on german exports, like they always did.

    The euro did work for german exports to the Netherlands, France, Spain, Italy and so on. This stability is a big advantage, but still covers only a part of german exports.

  12. You absolutely did not get my point. I am not concerned about German Panzers or Aspirin, but I am concerned about German cookies, milk powder and cheese which is flooding the CEE. This is largely possible due to popped export subsidies and has nothing to do with quality because the quality is bad.

    Exactly in the segment of cars, machinery etc. Germany has serious competition problems in the CEE market, because goods form US and Japan have largely improved in their quality, so Germany is relying largely on EU FTAs.

  13. In addition, you did not got my point even more because German export surpluses per se are not the evil. The evil lies in detail – how it is attained – by chocking the wages in the lower and middle classes. And by stepping up to the new ideology – we need the surpluses by ourselves, let’s trim the EU budget and suffocate EU Structural funds.

    See http://www.ftd.de/finanzen/maerkte/marktberichte/:das-kapital-exportschlager-kreditblase/50088352.html

  14. Last remark to: Do you really think, Latvia or Poland could compete with, say, german machine tools makers just by erecting custom barriers?

    Yes, I think Czech workers in Plzen can easily beat Turkish workers in Wolfsburg, and this has already happened.

  15. You have a tendency to racism and you live in otherwise in a fantasy world too. I’m not sure how exactly one division of the Volkswagen group can beat another and what that has to to do with your wishes regarding protective tariffs for eastern europe.

    And export subsidies inside the EU are illegal. (Common Market and it’s rules). And I doubt that the main german exports to eastern europe are processed foods like cookies and your obsession milk powder.

    I oppose the current german strategy of steadily shrinking wage too, but your myth-making doesn’t helps.

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