What Is The Level Of Deflation Risk In Germany?

Only one thing is really clear about the Germany economy at the present time, and that is that it is shrinking rapidly. In fact it contracted far more than most analysts and observers expected in the third quarter (although I, for one, was not especially surprised), entering what now appears to be its worst recession in at least 12 years as both exports and domestic spending continue to fall. German gross domestic product in Q3 dropped by a seasonally adjusted 0.5 percent from the second quarter, when it fell by a quarterly 0.4 percent, according to revised data from the Federal Statistics Office. The Germany economy last had a two quarter contraction of this magnitude back in 1996.

And all the signs are that the fourth quarter will be worse than the third one, so the situation may even surpass the 1996 recession.

And bad as 2008 has been the 2009 outlook promises to be even worse. The International Monetary Fund are now forecasting outright GDP contractions for the U.S., Japan and the eurozone next year, with Germany’s economy expected to shrink by at least 0.8 percent (this as we will see is one of the most optimistic forecasts currently on the table for German GDP next year). The European Commission declared the 15-nation eurozone to be in recession in November, and just over 40 percent of the exports from this highly export dependent economy go to other eurozone nations.

The only positive elements in the Q3 GDP data are to be found in the slight increases in both final household consumption and government expenditure. On a seasonal and calendar-adjusted basis, household consumption expenditure rose by a quarterly 0.3%, while government final consumption expenditure rose 0.8%. Gross fixed capital formation rose slightly (0.1%) due laregly to a sharp uptick in construction over the second quarter (+0.3%, following –3.4% in the second quarter and +5.5% in the first).

In addition there was a large increase in inventories, and inventories contributed a whopping 0.9 percentage points to Q3 growth (see chart below), and without this build-up the contraction would have been much sharper – so watch out since this inventory increase which will more than likely be unwound in the fourth quarter, with considerable downside impact. Imports were up significantly (largely due to the rise in oil prices – oil peaked around $147 a barrel in July), while exports dropped, as a consquence movements in the net trade balance had a negative impact on final GDP.

Capital formation in machinery and equipment (ie investment) was down sharply (–0.5%), after increasing for seven quarters in a row. Thus the entire positive impact of domestic consumption and increased inventories was more than offset by a very rapid and sharp deterioration in the net export position. Between July and September exports were down by 0.4% over the previous quarter, whereas imports were up 3.8%. This meant that net exports contributed a whopping minus 1.7 percentage points to q-o-q GDP, and headline German GDP is extraordinarily sensitive to changes in the net trade position (see chart below).

Deteriorating Short Term Outlook

Looking forward into Q4, the signs, as I said, are for deterioration, as can be seen from the fact that (according to the latest flash PMI) German services contracted for the third consecutive month in December, even if the rate of contraction was slightly less than that in November.

Worse still, the contraction in manufacturing accelerated, and sharply so, clocking up its fifth consecutive month of contraction according to the flash estimate. The data released by Markit Economics showed German manufacturing registering its lowest reading for manufacturing since the survey was started in April 1996, with the indicator falling to 33.5, down 2.2 points from the November result and significantly exceeding the 1.3 point decline expected by the analysts. If we break the figures down we find that output tumbled all the way to 29.9 (from 32.3 in November), while new orders slipped 3.3 points to a record low of 25.8. Meanwhile, the employment component reached its worse level in the history of the index, coming in at 40.9 for the month from November’s 43.6.

October Industrial Output Down

The PMI data are obviously only survey-based forward-looking estimates, but when we come to the actual data we find they are normally pretty near to the mark, since German industrial output fell strongly in October – dropping a seasonally adjusted 2.1 percent from September – according to the latest data from the Economy Ministry. Year on year working day adjusted output fell 3.8 percent. And November’s drop was led by a 3.1 percent month-on-month slump in the demand for investment goods, which means that companies are anticipating a serious slowdown in final manufactured goods further on down the line.

And the PMI is Confirmed By New Orders Data

I think nothing gives us a clearer illustration the dramatic nature of the industrial slowdown the Germans are now experiencing than the chart reproduced below which shows changes in monthly orders (both domestic and for exports) for German manufacturing industry over the last decade. As you will see (to use one of my choice phrases of late) we just went careering off a cliff.


New manufacturing orders dropped 6.1% in October from September, and in September they fell 8.3% from August. The quarter on quarter drop is huge – in the order of 40%.

Export orders are falling faster than domestic ones in the longer term during Sepetmber even domestic orders started to contract sharply as well – a 6.1% drop as compared to 6.2% for exports. What this suggests that the “second round effects” on domestic consumption from the drop in export sales are now hitting domestic manufacturing order books.

Exports Up Only 1.4% In October

Now it is, I think, generally accepted that German domestic demand is lacklustre, and has been for some years, and the German economy lives (or dies) from exports, so it is not without importance that according to the most recent provisional data from the Federal Statistical Office, October German exports were worth up only 1.4% (non price adjusted) and imports up 5.4% from their respective October 2007 levels. After calendar and seasonal adjustment, exports in fact decreased by 0.5% (and imports by 3.5%) month on month when compared with September.

The foreign trade surplus was 16.4 billion euros in October 2008, down from the October 2007 surplus of 18.9 billion euros.

Growth Outlook

It is very hard to put precise numbers on where the German economy is likely to go from here. Certainly GDP growth next year is going to be a shocker on the downside – with or without those notorious calendar adjustments. The Essen-based RWI economic institute are forecasting what now seems to be a “low end” prediction of a 2 percent contraction for next year, but even this would already be the biggest annual contraction since World War II. The have been joined by the IFO institute, who foresee a contraction of 2.2%. At the present time everyone is moving on the downside and accepting the reality of what is happening, with the Berlin-based DIW economic institute also cutting its forecast for the final quarter of 2008 to a contraction of 0.3 percent – down from previously anticipated growth of 0.2 percent (citing in justification the declines in industrial output and construction). The Kiel-based IfW suggested this week that the German economy will shrink 2.7 percent next year – the most pessimistic assessment by any leading research institute. Worse they are suggesting that equipment investment will drop 7.4 percent in 2009 (following a 4.9 percent this year) and that exports will decline 9 percent, (compared with an estimated gain of 5.1 percent in 2008). If these last two guess-timates are anywhere near right, then the German 2009 contraction will be very significant indeed, since exports are the key to the functioning of the German economy.

According to a report in the Frankfurter Allgemeine Zeitung earlier this month the Germann Economy Ministry currently estimate that the economy may shrink by as much as 3 percent next year.

Even further along the scale there is Deutsche Bank, who are forecasting a contraction of as much as 4 percent next year. Deutsche Bank chief economist Norbert Walter makes his forecast based on the deteriorating economic situation in Russia and in the Middle East, countries which have been vital in sustaining demand for German exports in recent months. As a fair weather pessimist on the German front, I feel that Walter may be near the mark than most, and my reasoning would be based on the severity of the downturn both in Russian and Eastern Europe, as well as the slump in Southern Europe, lead by Spain’s sharp and resonant housing crash. Since these regions collectively are customers for a very sizeable part of German exports, I expect a pretty horrendous H1 for German GDP in 2009 – and the bad news could go on a good deal longer, since I am sure the East and Southern European agonies are going to drag on at least int0 2010.

Business Confidence Plummets

Certainly the omens for Q4 2008 are now clear enough. German business confidence has been falling sharply since the summer, and dropped to its lowest level in more than of a quarter century in December. The Ifo institute business climate index, which is based on a survey of 7,000 executives, fell to 82.6 from 85.8 in November, giving the main index lowest reading since November 1982. The drop was largely a product of a significant fall in the current economic situation component – which fell to 88.8 from 94.9 in December. Expectations remained largely unchanged at a very low level.


The main sub components all remained very low in December,but what is most striking is the rapidity of the deterioration we have been seeing in the manufacturing sector.

German consumer confidence has held up rather better (possibly a function of the resilience of the labour market, and the drop in inflation) and has remained largely unchanged following a fairly sharp deterioration in August. In December growing pessimism about the short term economic outlook was offset by a stronger willingness to buy, and GfK AG’s forward looking index for January, based on a survey of about 2,000 people, held steady at 2.1.


Employment Resists The Downturn

German unemployment continued to drop in November, despite the scale of the recession that just hit the country, and employers continue to retain and even recruit staff while orders slump. The number of people out of work, adjusted for seasonal variations, dropped a further 10,000 in November to reach 3.15 million, following a 26,000 fall in October, according to data from the Federal Labor Agency. The seasonally adjusted unemployment rate held steady at 7.5 percent, a 16- year low.

Meanwhile separate data from the Federal Statistical Office show that in October 2008 there were 40.84 million Germans in employment, an increase of 538,000 (or 1.3%) over October 2007 . In facr this was the highest number of Germans employed ever. Month on month the number of those employed was up by 219,000 on an uncorrected basis, which was equivalent to an increase of 39,000 ( or 0.1%) on a seasonally adjusted basis. So the great German jobs machine is still working.

The big question which is puzzling many economists however is why this increase in employment does not feed though to private consumption. My own personal feeling is that you need to look at the age profile of the German workforce, and the low value added content of much of the new employment. Some reflection of this can be found in the fact that (on aggregate) labour productivity (price-adjusted gross domestic product per person in employment) in the third quarter of 2008 was down by 0.1% year-on-year in Q3 2008. When measured on a per hour worked basis labour productivity was down by 0.2%.

So jobs are created, but household consumption expenditure hardly moves, and in fact it decreased by 0.3% year on year in Q3, despite the 0.3% increase quarter-on-quarter. So as unemployment has fallen German households have been spending less, especially on food, beverages and tobacco (–1.5%) and on transport and communications (–3.1%). The big factor in the latter decline was the marked decrease in private car purchases and the sharp drop in petrol consumption. As can be seen in the chart below, following the pre- VAT rise spike in Q4 2006, household consumption has remained decidedly lacklustre, despite the economy have had one of its most substantial expansions in over a decade.


If we look at the seasonally adjusted monthly retail sales chart (see below) we will see that these have been dropping steadily (stripping out the December 2006 spike) since mid 2006, and the decline continues.

Price Inflation Falls Dramatically

So to get back to the question I ask in the title to this post, we know that the German economy is going to contract sharply next year – by anything between 2 and 4 percentage points – so given the severity of this shock just what are the dangers that the sudden negative energy shock can push core inflation over into deflation mode?

Well, if we look at German producer prices – which can reasonably be considered a forward looking indicator for future prices, we find that they dropped sharply in November – in fact by the most since records began in 1949. This was of course a reflection pf the fact that the cost of oil declined drastically, but it is also an indicator of growing excess capacity as the global economic slowdown curbs demand. Producer prices fell 1.5 percent month on month, while the year on year rate fell back 5.3 percent. But if we look at the index itself (see chart) we will see that prices peaked in July (when oil prices were at a record), and have been falling steadily since.


And if we take a look at German consumer and producer price inflation together (see chart below), we will see that the energy price shock went in two waves. When the first wave petered out, consumer prices also fell, but they soon steadied, as the force of the expansionary momentum helped prices find a floor. But look what is happening after the second wave, producer prices are in virtual freefall, and these are dragging consumer prices along behind them, and when we think of the scale of contraction which we may well see in 2009, then it seems to me that the danger of opening up a deflationary dynamic behind the shock is a real and credible one.

In fact German consumer price growth slowed to 1.4 percent in Novermber according to the EU harmonized measure, down from 2.5 percent in October, falling significantly below the ECB’s price stability threshold of around two percent, and the lowest level in two years. Again this was the biggest decline since the federal statistics office started calculating German inflation using the HICP methodology in 1996. From a month earlier, prices were down 0.6 percent.

Again if we look at the index itself, we can see that prices have been falling since the summer, but if we dig a bit deeper, and take a look at the core index (that’s the one to watch really, without energy, food, alchohol and tobacco, see chart below) then we will find that even on this measure prices have been stationary, and what we now need to watch out for is that the shock from the credit crunch driven GDP contraction addeded to the negative energy shock doesn’t simply drive the core index into negative territory. It is impossible to say at the present time whether this will actually happen, but obviously the risk is real, and those over at the ECB would do well to remember this.

Fiscal Stimulus And Rising Deficit Pressure

Reactions to a problem of this magnitute will need to be on two fronts. The ECB obviously need to bring interest rates down rapidly and dramatically, and probably need to be thinking about how they can operate Japan and US style quantitative easing within a Eurosystem framework. On the other hand a fiscal response is essential, and Angela Merkel is reputedly considering a new package of measures in the early new year in addition to the stimulus package (estimated to have a net worth of about 31 billion euros in 2009) already announced.

The German Premier met the leaders of Germany’s 16 states last Thursday to discuss additional measures, but no details of the package under discussionhave yet been announced. Angel Merkel did, however, suggest on Friday that the emphasis will be on infrastructure projects such as schools and roads – but since the areas of the Germany economy which are currently suffering most are the exports and capital goods sectors it isn’t clear how much value this will really be.

But all of this has a downside, since it is now estimated that Germany will need to sell more debt next year than at any time since the end of World War II to finance the vaious measures being taken. Gross federal bond sales are set to expand by nearly 50 percent – to 323 billion euros ($471 billion) from 220 billion euros this year – according to the emissions calendar of the Federal Finance Agency. The 2009 issuance will be made up of 149 billion euros in bonds with a maturity of one year or more and 174 billion euros in shorter-dated money market securities.

The bond sales calendar is based on a budget that assumes economic growth of 0.2 percent next year, but as we have seen above this forecast is way out of line with what leading economic forecasters anticipate, thus the level of financing will likely be considerably greater at the end of the day, even without any additional stimulus packages.

Thus, following a 2008 budget which was basically balanced following a longer term strategy, Angela Merkel will now need to cope with a federal deficit which is certainly going to expand significantly as tax growth dwindles and spending rises. And bank rescue costs will come on top of the above, pushing the credit requirement up even further. Germany created a 480 billion-euro bank rescue fund in October comprising 400 billion euros in guarantees and as much as 80 billion euros in recapitalization steps, both of which will need to be financed in some form or other through the bond market. It is thought that around 200 billion euros will be approved in guarantees by the end of January and about 20 billion euros in capital measures. It seems however that bonds sold to boost banks’ capital reserves will be reported off budget, and thus not figure in accounts reported to the European Union’s Eurostat office.

Germany plans to finance part of its 500 billion euro ($636 billion) bank rescue package by issuing bonds to banks in exchange for new preferred stock, according to Finance Agency head Carl Heinz Daube. “The banks will not be allowed to sell the injected government bonds,” Daube said in an interview in Tokyo today. “So far there’s obviously not a huge demand for any rescue measures, but this might change in the coming weeks.” Germany’s rescue plan, approved by lawmakers on Oct. 17, amounts to about 20 percent of the gross domestic product of Europe’s biggest economy. Chancellor Angela Merkel’s administration pledged 80 billion euros to recapitalize distressed banks, with the rest allocated to cover loan guarantees and losses.

Despite the changed dynamic in public finance, however, the German government is unlikely to experience any real difficulties selling its debt, and the country continues to enjoy a “stable” outlook from Moody’s Investors Service on its Aaa government bond ratings according to a report published earlier this month.

“Germany’s public debt payment capacity is strong and Moody’s anticipates no problems with regard to affordability or adverse debt dynamics, even with the impact of the economic slowdown likely to be felt on both sides of the government balance sheet,” said Moody’s analyst Alexander Kockerbeck.

It is not clear, however that things are going to remain quite so cut and dry in the future, as the government continues to expand net borrowing on the one hand while slower economic growth even after the recession, on the other, will continue to restrain revenue growth. And as Germany’s population ages, health and pension costs are set to mount, and to some extent all this fiscal strain is going to undo a lot of the impact of the “good housekeeping” measures taken in earlier years, making another set of painful reforms more or less inevitable as and when the recovery comes. Angela Merkel is undoubtedly well aware of this harsh reality, and this is surely part of the explanation for why she has tried to keep debt growth under control as possible – much to the chagrin of her EU counterparts in London and Paris, where the demographic dynamics are, of course, much more favourable – even as her budget expands to pay for the emergency fiscal programs.

“A balanced budget remains our target because the demographic changes in Germany will increasingly have an effect from the middle of the coming decade. We must not overburden the younger ones,” Merkel said.

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".

8 thoughts on “What Is The Level Of Deflation Risk In Germany?

  1. “The big question which is puzzling many economists however is why this increase in employment does not feed though to private consumption. My own personal feeling is that you need to look at the age profile of the German workforce, and the low value added content of much of the new employment.”

    Well, stagnating wages till at least 2007 might have played a role too?
    Stagnierende Löhne, steigende Kapitaleinkünfte (in German).

    Translating one paragraph on the fly:
    “During the period of wage restraint wages as a percentage of national income went down from around 72% in 2000 to 64.6% in the first quarter of 2007. Inversely the percentage of business profits and capital income has risen.”

    So:
    – stagnating wages (maybe even falling some of those years when adjusted for inflation)
    – no housing boom/bubble in Germany
    – credit cards are unpopular in Germany
    – a federal sales tax increase from 16% to 19% on January 1, 2007. Just after 1+ year of economic growth.
    – rising oil prices till 2008
    —> resulting in stagnating or falling domestic spending.

    Why do we need demographics for that?
    You´ve got tax raises and higher gasoline prices coupled with stagnating wages so of course less is available for consumption. Unless of course you want to follow the US and UK model with debt-financed consumption?
    (Although you´re partly right. At least some of the new jobs were low wage jobs. Not much higher than unemployment benefits.)

    The last newspaper reports published shortly before Christmas mentioned a “good” Christmas business for retailers. With slightly rising sales year over year. They wrote that probably rising wages in 2008 and lower gasoline prices were responsible for that. Who would have thought that more money in the wallet might lead to more consumption? 🙂
    Probably not the economists you mentioned?

  2. Hi Detlef,

    “Why do we need demographics for that?”

    Well:

    “stagnating wages (maybe even falling some of those years when adjusted for inflation)”

    Well, the rising median age of your population means that the labour force is not so productive as it was. In crude terms – on aggregate – it is not worth what it used to be. This is one of the reasons that Germany has been outsourcing higher value work (due to the shortage of skilled young people at home, and thus the comparatively higher cost) to the East and taking the lower value work to reduce unemployment back home (reversing the traditional US role of Maquilladras in Mexico) – as Munich based researcher Delia Marin has been pointing out for some years now. It all builds up and up.

    “no housing boom/bubble in Germany”

    This is straight demography I’m afraid, same case Japan, same case Italy. NO country with a median age over 41 has had a major housing boom since it crossed that threshold. We are still waiting for a counter example – the stereotypical housing boom people (UK, US, Spain, Australia, Ireland, Iceland etc) all are aged between 35 and 40. The theory to explain this isn’t that difficult, since people in the higher age cohorts don’t take on so much debt, and when their specific weight in the population passes a certain level, well then housing – like the proverbial goose – is well and truly “done”.

    Basically, the German financial system has problems because the excess savings (the CA surplus) went into housing booms elsewhere – USA, Spain, Ireland etc.

    “Just after 1+ year of economic growth.
    – rising oil prices till 2008”

    You’re right here. This one is laregly explained by events elsewhere. But, of course, it is the export dependence which means that the crash at the end of only one year of boom is so substantial.

    “a federal sales tax increase from 16% to 19% on January 1, 2007. Just after 1+ year of economic growth”.

    This one is all about demography. It was an (ill-advised) attempt to pay for the extra elderly dependence without cutting back on services. It didn’t work, as we can see from the chart above, and it effectively killed off what little life household consumption had at that point, not that you’ll find the politicians and the economists who advised them on this admitting it.

    “The last newspaper reports published shortly before Christmas mentioned a “good” Christmas business for retailers. With slightly rising sales year over year. They wrote that probably rising wages in 2008 and lower gasoline prices were responsible for that.”

    I’m sorry, this is just spin in my opinion. You may see some small improvement in xmas cheer. I don’t say that that is impossible. But if you look at retail sales as classified at the Federal Statistics Office, then these definitely peaked in 2006, and are now in what I think could well turn out to be long term decline, so even if there is a blip, this is unlikely to change things substantially.

    Basically, as with the fertility issue ( eg the famous “babies in Dusseldorf” episode – after all the fuss, live births in Germany had only a very slight increase last year) German opinion is just not facing up to what is happening, and as a result nothing substantial is being done to try and correct course.

    This is very dangerous. The current slump is set to be much worse than 2001/02. Recovery is going to be hard – it isn’t at all clear who is going to buy the extra exports next time round – and even when we do get lift-off, well I dread to think what things will look like at the end of the next cycle (2015-2016??), I really don’t. Better to get that national debate started, and to get it started now.

  3. Two quite relevant extracts from recent Federal Statistics Office Reports.

    As reported by the Federal Statistical Office (Destatis), the number of first graduates at German institutions of higher education increased to 239,900 in examination year 2007. Hence the graduates rate, that is the share of graduates of a first course of studies in the age-specific population, reached an all-time high (24%). To meet the rising demand for highly qualified employees over the next few decades, the graduates rate should be raised to 35% in the medium term, according to the opinion of the Science Council. In an international comparison, too, the graduates rate in Germany is again below the average of the OECD countries, which in examination year 2006 was 37%. When calculating the graduates rate for Germany without the colleges of public administration, which are not included in the higher education sector according to the international definition, it was 21% in 2006 and 23% in 2007.

    This is why there is so much high skilled outsourcing to places like Poland and the Czech Republic.

    As reported by the Federal Statistical Office (Destatis), about 4.4 million persons in Germany, which is about every tenth employee, worked in the health sector on 31 December 2007. Hence, in 2007, there were about 63,000 more jobs in the health sector than in 2006, which is a job growth of 1.5%. Compared with the previous years, that was the largest increase in jobs in the health sector – figures from health personnel accounts have been available from reference year 1997. Between 1997 and 2000, the number of staff in the health sector decreased slightly at first (–20,000 employees or –0.5%). Then the number of employees rose considerably by a total 143,000 or 3.5% until 2003. Between 2003 and 2006 total employment growth in the health sector (+75,000 jobs or +1.8%) was somewhat more moderate.

    WIESBADEN – As reported by the Federal Statistical Office (Destatis), 2.25 million persons in Germany were in need of long-term care in December 2007 as defined by the Long-term care insurance Act – Code of Social Security Legislation XI. Due to the ageing of the population, that were some 118 000 persons or 5.6% more than in 2005 and 231 000 persons or 11.4% more than in 1999, when the survey was conducted for the first time.
    The majority (68%) of those in need of long-term care were women. 83% of the persons needing long-term care were 65 years and over; about one third (35%) were 85 years and over.

    And as I said in my last comment, fertility hardly moved in Germany in 2007. True births were up slightly, but this is hardly a revolution, and it was the height of the boom, and you need to take into account the slightly larger number of women in the key child bearing ages. But the Tfr remained stuck in the 1.3 range (up to 1.37, but a far cry from the 1.45 which was being loudly trumpeted at press conferences by your family minister in the spring). I think its time to say, enough of all those it doesn’t matter, it’ll get better tomorrow attitude. If you care about your country (and I’m sure you do) it’s time to do something.

    Now we wait to see home much damage a couple of years of sharp economic contraction will do to short term fertility.

    As reported by the Federal Statistical Office (Destatis), the average number of children per woman in Germanywas 1.37 in 2007, up from 1.33 in 2006. This was the first rise since 2004. 2000 was the last year in which the average number of children per woman was higher (1.38). In 2007, some 685,000 children were born, about 12,000 more than in 2006. As in past years, the average number of births by younger women continued to decline in 2007, while it rose for women in their late twenties or older. Even in comparison to earlier years, a particularly strong increase was observed in 2007 for women aged from about 33 to 37. The average number of children increased in both western and eastern Germanyin 2007, reaching 1.37 in each part of the country. Accordingly, for the first time since 1991, the average number of children per woman was at the same level in the new Länder as in the former territory of the Federal Republic(in each case excluding Berlin).

  4. Getting away from the demography for the moment, what is interesting is the way the job market has held up, and just how consumer confidence has been sustained by the fall in oil prices. It will be interesting to see how all this changes now going forward, although do note this proviso from the Federal Statistics Office in their last labour market report.

    As reported by the Federal Statistical Office (Destatis) on the basis of first calculations for October 2008, the number of persons in employment whose place of residence was in Germanyamounted to 40.84 million. That was an increase by 538,000 persons (+1.3%) on October 2007 and the highest number of persons in employment ever. But experience shows that it often takes several months for trend changes in the overall economic development to show on the labour market.

  5. How do you arrive at the reasoning of a work force of lesser worth? Rising median age should also mean fewer trainees and more experienced workers. What tells you Germany is on the right side of the peak?

  6. “What tells you Germany is on the right side of the peak?”

    The annual productivity numbers Oliver, and the fact that lots of jobs have been created, but wages have hardly moved.

    My own personal feeling is that you need to look at the age profile of the German workforce, and the low value added content of much of the new employment. Some reflection of this can be found in the fact that (on aggregate) labour productivity (price-adjusted gross domestic product per person in employment) in the third quarter of 2008 was down by 0.1% year-on-year in Q3 2008. When measured on a per hour worked basis labour productivity was down by 0.2%.

  7. Ok, so those numbers are consistent with less productivity due to age. But what tells you that eg. it is not caused by a combination of too low unemployment and a shitty educational system forcing German companies to scrap the bottom in terms of skills?

    In fact we know that graduation rates in Germany are low, but in a shrinking population more resources should be spent on an individual, so why is that?

    Thirdly, if young workers really become scarce why don’t we see rising wages for the young?

  8. Hi,

    Look, there is no conclusive evidence here, only pointers. The strongest evidence in my book is the similarity between Germany and Japan in all of this.

    “But what tells you that eg. it is not caused by a combination of too low unemployment and a shitty educational system forcing German companies to scrap the bottom in terms of skills?”

    Well, actually, isn’t that what the Hartz reforms were all about, forcing people at the bottom of the employability range off the registers and into work. A lot of these people were over 55.

    “Thirdly, if young workers really become scarce why don’t we see rising wages for the young?”

    Well this is what Delia Marin argues about Easten outsourcing (and Hans Werner Sinn is more or less in the same line) – that the skilled work was outsourced to expand the pool of available skilled workers, and hence keep wages down. This part seems to have worked.

    But…. the thing is if Germany hadn’t done this, then even what little economic miracle we have seen wouldn’t have worked, since there wouldn’t have been sufficient competitiveness to boost up the exports machine.

    I don’t know why the German education system is as it is, that’s way beyond my expertise. Although, incidentally, all the international “ranking” reports I have seen have come to similar conclusions here.

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