Germany runs out of export fuel

There is a pertinent and very clear analysis of the problems facing the German economy in the analysis page of my Financial Times today. The essence of the article is that Germany has for decades relied upon exporting as its main source of growth and now that global trade is shrinking at such an alarming rate, the economy is finding it difficult to readjust and find domestic sources of demand. There is a deep underlying reluctance among German policy makers to use extraordinary fiscal policy stimulus as a way of expanding demand and absorbing some of the spare capacity created by the sharp drop in exports. Germans are fearful of a return to high inflation (they remember well the impact of reunification in the early 1990s).

“Germany was a sitting target after the collapse of Lehman Brothers investment bank in mid-September. Its exports were equivalent to more than 47 per cent of GDP last year – compared with less than 20 per cent in Japan and about 13 per cent in the US. Its industrial base is skewed towards producing machinery and equipment – “investment goods” account for more than 40 per cent of its exports – and towards emerging European and Asian economies.” More here

I wrote last week about the apparent success of their car scrappage scheme in boosting demand for new vehicles - this is a shot in the arm for car manufacturers but we should always beware of the law of unintended consequences - the subsidy for trading in old cars seems to be hitting spending in other areas of the retail sector.