Doubts on Germany's consumption-led growth
Germany is booming. The IMF predicts that Europe's largest economy will grow 3.3% this year, the highest among major advanced economies. The latest Ifo Business Climate Index, a closely watched indicator of Germany's economy, marked 109.3, the highest since unification. Some might think of bouncing consumption as the principal driver of the country's recovery, which wouldn't be enough to save the world but at least could help ailing allies in Europe amid intense pressure, mainly from the US, to expand domestic demand to dissolve global imbalances.
Is a country which has been renowned for its gigantic exports transforming itself from an export-dependent to a consumption-led economy? The details of Germany's third quarter GDP would illustrate a somber picture, as opposed to some claims, of a country which still has to rely on external demand to bolster its development while on the way to a service economy.
Regarding to the Ifo Business Climate Index, Germany's Economy Minister Rainer Bruederle is boasting that "Germany's economic recovery is self-sustaining," and "Germany is on a fast track towards the goal of full employment."
Unfortunately, to sustain the economy, Germany is still badly in need of the world demand. Exports' share rose above 51% in GDP, the highest in two years, whereas domestic consumption's share fell to the two-year low. External balance, exports minus imports, has gradually claimed an increasing share among GDP after plummeting in 2009. Household consumption contributed to more than one third of GDP growth in the third quarter, but it's quite uncertain about the durability of domestic demand without exports.
The other important important aspect of Germany's economy is that the increase in employment is almost coming from a service industry, not manufacturing. In fact, 40% of the increase in the third quarter employment derives from finance, and 30% from other services, while manufacturing has only 16%.
The rise of service industry has changed a compensation structure. Finance and other services compensation have already reached above the pre-Lehman crisis level, whereas manufacturing is still 3% lower.
Moreover, in terms of gross value added, other services has grown 4%, and finance 1% since the Lehman crisis, but manufacturing has lost 9%.
What do these numbers tell us about Germany's economy? Severe price competition coupled with rising costs could cap revenue, hence compensation and employment in the coming months. On the other hand, the economy is mutating into a service-base society for more profits and opportunities, but would stagnate given a lackluster domestic demand. Germany would have to make sure that its domestic recovery is enduring enough to sustain the economy, hence able to absorb exports from other countries.
Is a country which has been renowned for its gigantic exports transforming itself from an export-dependent to a consumption-led economy? The details of Germany's third quarter GDP would illustrate a somber picture, as opposed to some claims, of a country which still has to rely on external demand to bolster its development while on the way to a service economy.
Regarding to the Ifo Business Climate Index, Germany's Economy Minister Rainer Bruederle is boasting that "Germany's economic recovery is self-sustaining," and "Germany is on a fast track towards the goal of full employment."
Unfortunately, to sustain the economy, Germany is still badly in need of the world demand. Exports' share rose above 51% in GDP, the highest in two years, whereas domestic consumption's share fell to the two-year low. External balance, exports minus imports, has gradually claimed an increasing share among GDP after plummeting in 2009. Household consumption contributed to more than one third of GDP growth in the third quarter, but it's quite uncertain about the durability of domestic demand without exports.
The other important important aspect of Germany's economy is that the increase in employment is almost coming from a service industry, not manufacturing. In fact, 40% of the increase in the third quarter employment derives from finance, and 30% from other services, while manufacturing has only 16%.
The rise of service industry has changed a compensation structure. Finance and other services compensation have already reached above the pre-Lehman crisis level, whereas manufacturing is still 3% lower.
Moreover, in terms of gross value added, other services has grown 4%, and finance 1% since the Lehman crisis, but manufacturing has lost 9%.
What do these numbers tell us about Germany's economy? Severe price competition coupled with rising costs could cap revenue, hence compensation and employment in the coming months. On the other hand, the economy is mutating into a service-base society for more profits and opportunities, but would stagnate given a lackluster domestic demand. Germany would have to make sure that its domestic recovery is enduring enough to sustain the economy, hence able to absorb exports from other countries.
Labels: Germany
posted by Akihiro Gotoda at
9:43 AM
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