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Germany Faces Long, Slow Economic Recovery

Wednesday, 13 January 2010 02:11 PM Current | Bio | Archive

The German Federal Statistical Office has released the complete 2009 gross domestic product, or GDP, numbers that show Germany, the world’s fourth economical power, has been experiencing the deepest recession since World War II.

The German economy shrank in 2009 for the first time in six years.

The 5 percent decline in the price-adjusted GDP was the largest since World War II.

The economic slump occurred mainly in the winter half-year of 2008 and 2009.

During the year, there were signs that the economic development would slightly stabilize on the new, lower level.

In 2008, GDP had risen by 1.3 percent, in 2007 by 2.5 percent and in 2006 by 3.2 percent.

What is striking about 2009 is that both exports and capital formation in machinery and equipment slumped heavily.

Foreign trade, which in previous years had been a major driving force for growth in the German economy, slowed down economic development in 2009.

While exports were down a price-adjusted 14.7 percent, the decrease was just 8.9 percent for imports.

Hence, the balance of exports and imports made a negative contribution to GDP growth, as it had done in 2008.

However, with negative 3.4 percentage points, it was markedly larger in 2009 than in 2008 (at negative 0.3 percentage points).

Although the total number of persons in employment within the economic territory was relatively stable, marked job cuts occurred in some economic sectors.

This affected, in particular, industry (including energy) with negative 2.7 percent and financial, real-estate, renting and business activities with negative 1.5 percent.

However, the number of hours worked on average by every person in employment decreased in nearly all economic sectors.

For the overall economy, the number of hours worked per person in employment was down by 2.8 percent from the previous year.

This development suggests that job cuts have not been the main reaction of Germany to the economic crisis.

Instead, working hours were often reduced, especially through part-time work, the reduction of working time accounts as well as temporary reductions of weekly working hours as provided for in collective agreements.

The net national income (factor costs) consists of compensation of employees and property and entrepreneurial income.

In 2009, it decreased for the first time since German unification, by 4 percent to 1.81 billion euros ($2.62 billion).

In 2009, the disposable income of households increased by just 0.4 percent to approximately 1.56 billion euros ($2.27 billion). This was the lowest growth rate since German unification in 1990.

Following three years of considerable dynamism, capital formation, too, was markedly down in 2009 compared with 2008.

Gross capital formation, which is composed of gross fixed capital formation that is mainly gross fixed capital formation in machinery and equipment and gross fixed capital formation in construction and changes in inventories, decreased by a price-adjusted 12.5 percent.

Yes, the way to recovery will be slow and long in Germany, the main engine of the euro zone, and consequently in the euro zone as a whole.

In this context, I must further emphasize on the integral role of China in understanding developing trends in the global marketplace.

In my opinion, it’s a fact that the People’s Bank of China’s (PBOC) currency policy has been a significant factor so far in the inexorable rise of the euro in comparison to the dollar since the fourth quarter of 2000.

China’s currency policy would certainly explain the global currency market’s apparent indifference to the uncertain fate of some of the euro zone’s weaker members like Greece, Spain, Portugal, Ireland and even Italy.

However, there is more than this: China, the world’s third largest economy ahead of fourth-place Germany, is undoubtedly designated as “the global engine of growth,” which helps to explain why stocks, as well as the euro, fell Tuesday on the PBOC’s announcement it would raise banks’ reserve requirements Monday, Jan. 18.

China should never be too far from international investors’ minds.

For now, China is surely not on its way of jeopardizing its recovery.

The PBOC speaks indeed of the need to manage liquidity rather than the current level of interest rates.

For now, it’s anyone’s guess where the PBOC is really putting its aims.

We’ll have to wait until next week’s release of the extremely important China GDP report to get a first indication what lies ahead in terms of policy pro-activity in China.

Investors should note that any number in excess of 10 percent GDP growth will signal the real start of China beginning to apply the brakes on growth more firmly.

If so, then the dollar should firm against the euro for fundamental reasons.

On the markets, I’d like to say China’s announcement that the POBC will tighten monetary policy as of next Monday by raising bank reserve requirements has caused nervous profit-taking in global stock and commodity markets.

China has been the engine driving the global economic recovery as well as rising stock and commodity prices.

Any indication that Chinese monetary authorities could slow things down will send chills through the camps of the global bulls.

Strictly speaking on stock markets, there's another serious reason to keep a close eye on China because its stock market is no longer leading the world stock markets higher.

It might just provoke the opposite.

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The German Federal Statistical Office has released the complete 2009 gross domestic product, or GDP, numbers that show Germany, the world s fourth economical power, has been experiencing the deepest recession since World War II. The German economy shrank in 2009 for the...
Wednesday, 13 January 2010 02:11 PM
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