German Export Machine Starts Creaking

Germany has perennially run large trade surpluses with the rest of the world and used external demand as an important source of demand growth for their domestic industries. Germany ran a current account surplus of 7.6 per cent of gross domestic product in 2007.

Germany is the Euro Area’s biggest economy and in 2003 became the world’s biggest exporter. It has developed significant competitive advantages in industrial manufacturing and technology and in a world leader in mechanical engineering, holding about 20 percent of the global market. Just think of some of the world’s major high value-added manufacturing brands - DalmerChrysler, BMW, SAP, Siemens, Volkswagen, Adidas-Salomon and Porsche.

As our chart shows the annual rate of growth of exports has in recent years grown faster than her real GDP, the result has been a large and rising share of exports as a percentage of national income. Overseas sales have, to some extent, masked relatively weak consumer spending. Indeed real household consumption has been flat in real terms for the best part of two years.

But now the macroeconomic situation is changing.

Germany’s economy has much strength but there are signs that her export sector is finding it tough as the global economic cycle turns.

The pressures are intensified because of the steep appreciation in the value of the Euro which makes German manufactured exports more expensive in non Euro Area markets.

Although Germany has prided itself on excellent non-price competitiveness the rising exchange rate allied to weakening international markets is combining to cause export demand to slump. And a decline in exports is bad news for the German economy. The Kiel-based Institute for World Economy is predicting that Germany will suffer a severe recession in 2009 with real GDP falling by 2.9 percent - the worst downturn in her post-war history.

Little wonder that business and consumer confidence has taken a dive with expectations of a sharp rise in unemployment. Major German carmakers, like BMW and Volkswagen, have announced that they are scaling back production and other companies are starting to lay off workers in their thousands. Industrial production is already falling at an alarming rate.

Whereas other countries have opted for huge fiscal stimulus packages to boost aggregate demand, the German Finance Minister, Peer Steinbrueck has opted for a more cautious approach. Indeed he made the headlines recently when attacking Alastair Darling for a switch to what he called “crass Keynesianism.”

Perhaps the likely depth and pain of the German recession in 2009 might bring a change of approach because by the middle of next year, German exports, investment and consumption are all forecast to be declining. Germany’s export machine remains structurally impressive but it is not immune to one of the broadest and dangerous economic downturns in living memory.

BBC
Unemployment fears worry Germans

International Herald Tribune
German economy expected to contract 2.7% in 2009

Guardian
German business morale slumps as exporters suffer

Financial Times
Wolfgang Munchau
Complacency rules as time slips away