In Focus Commercial Credit Europe’s driving force
What a German recession means for the rest of the continent
Artur Baluszynski Head of research, Henderson Rowe
artur@hendersonrowe.com
The German economy grew at its slowest annual rate between August 2018 and July 2019 since the depth of the 2011 euro crisis. The September PMI numbers dropped to 49. It is the first time since April 2013 that
Germany’s PMI, which tracks manufacturing and services sectors, fell below 50. What is worse, its August manufacturing
PMI dropped to 43.5, well below the 50 mark that indicates recession. Around 22% of Germany’s GDP comes from manufacturing, and the automotive sector, one of its most significant components, is down 18% since its peak in August 2017.
Getting into the situation Germany’s reliance on the rest of the world to buy its products and the lack of political will to develop domestic sources of consumption are set to turn into a significant issue. So how did Germany get itself into this situation? In the 1990s, Germany took a politically
difficult decision: to cap workers’ pay and unemployment benefits to ensure the economy can compete with emerging Asia and Eastern Europe. Wage growth of German workers dropped
from 3% in 1990 to just over 1% in the following decade. Subsequently, Germany’s current account surplus rose from 1.7% to more than 7% over the same period, while Greece, Portugal, and Spain saw their current-account deficits adjusted upwards by a similar magnitude. Recent economic data highlight the
problem with Germany's economic model. However, it could lead to a very much needed rebalancing, which would be better for the Eurozone in the long term. Can a German recession be good for the rest of Europe?
December 2019
Negative impact Our initial thoughts tell us that a German recession could have a significant negative impact across European supply-chain interconnections, and one would expect German woes to spill over to Southern and Eastern Europe due to a slowdown in investments. However, this does not tell the real story. As Germany has historically been running
a current-account surplus with other Eurozone economies, it is deficit economies
chose not to do so. Instead, it has increased its current account surplus with China, US and the UK.
Trade war Recently, the German economy has been a victim of the ongoing China-US trade war. The recent re-emergence of protectionism and populism, which is destroying global demand, means that Germany will find it difficult to sustain its ‘economic miracle’ without re-building its domestic demand. Germany is running out of economies
If these economies decide to address this issue without Germany lowering its surplus or running a corresponding deficit, they would have to find other economies outside the Eurozone willing to do so
that fuelled the demand for German products and recycled excess German savings, driving asset-price bubbles and capital misallocation in the likes of Spain and Portugal. When imports collapsed due to austerity
in Southern Europe, Germany turned to China. After the global financial crisis in 2008, China started rebalancing its economy, which resulted in a significant reduction of its current account surplus. In other words, China has been focusing
on developing domestic demand. Germany could have also addressed its overreliance on the external demand but
www.CCRMagazine.com
willing or able to absorb its production. Stronger German consumption is also needed for the rest of Europe to rebalance away from recycling German savings, allowing for a fair competition of capital. Being locked in the currency union with
Germany means that countries such as Portugal and Spain can do little but to absorb its excess savings. If these economies decide to address this issue without Germany lowering its surplus or running a corresponding deficit, they would have to find other economies outside the Eurozone willing to do so. A German recession, induced by the
recent global slowdown, might force the country to start addressing its weak domestic consumer market with higher wages and new fiscal measures. This should be positive for the Eurozone as it will address the imbalance created by the monetary union. Higher earning power for German
consumers would mean a lower share of income for German corporates – a painful pill but potentially a necessary one to swallow considering weak global demand. Whatever the solution Germany chooses,
history tells us that things need to get really bad before the momentum swings the other way. CCR
17
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52