by TGeraghty
Sat Aug 20th, 2005 at 02:36:56 AM EST
Excellent piece from this morning's diaries ~ whataboutbob
Well, look who's bullish (sub req'd) on the German economy!
(via Der Spiegel):
Maybe they've been reading the European Tribune?
Why is the Economist suddenly so enthusiastic about the near-term prospects for the German economy?
(1) Unemployment is beginning to fall:
- In July unemployment fell for the fourth month in a row
- There are 50% more job vacancies than there were a year ago
- Surveys suggest that employers are becoming more bullish, expecting to hire more workers in the coming months. Manpower, a recruitment consultant that tracks employers' intentions across the world's big economies, notes that the rise in Germany's indicator has been stronger than movements anywhere else.
- The number of self-employed has risen from 4m four years ago to 4.4m at the end of June.
- So-called "one-euro" jobs, which dignify unemployed people by paying them one euro an hour plus their benefits, have proved popular, with over 200,000 being created, as have "mini-jobs" paying €400 a month.
(2) German companies have shown a remarkable improvement in their
competitiveness:
- Falling unit labour costs, partly a result of "social partnership" bargaining between business and labor unions giving business wage and benefit moderation and longer working hours in return for employment guarantees -- "unions have been pragmatic behind the scenes in order to save jobs."
- Also, more flexibility: more than 30% of Germany's workforce are now employed in part-time or temporary jobs, meaning that firms can deploy their labour much more flexibly than in the past.
- As a result, strong performance by big companies, which have reported healthy profits, driven largely from exports to countries where demand is thriving:
Disturbingly, the Economist reports, "the profits and activities of leading German companies have become somewhat dislocated from the economic fortunes of Germany as a whole."
[B]usiness leaders are beginning to feel more confident. Last month a much-watched index of business confidence rose by more than analysts had expected, perhaps because of the strong profits performance that was evident when the latest set of quarterly results were announced. Two-thirds of Germany's top 30 listed companies produced improved results for the second quarter of the year. That includes jumps of more than 20% over the same period last year by chemicals firms Altana, BASF and Bayer and respectable earnings from energy producers, insurance companies and banks.
(3) The improved position of the banks:
All the biggest banks now have their costs and their balance sheets under control. Much of the banks' real-estate portfolios and their non-performing loans secured against property have been sold off at distressed prices. The challenge now is for the banks to take more risk in their lending to medium-size companies. Good performance from them will be needed to underpin a sustained recovery.
(4) Increased attention to long-term investments in education and innovation:
A perceived "innovation gap", which is closely linked to failings in education and research, has attracted much more attention in recent years. . . . In 2004 Chancellor Gerhard Schröder formally launched an initiative with leading companies, dubbed "partners for innovation". Various working groups have been set up, including ones for stimulating new approaches to information technology, specialist materials, education, energy conservation, computerising health services and harnessing venture capital and state aid. Some of these groups have begun long-term projects that will survive any change of government that results from next month's election. And there is money available to publicise the long-term importance of innovation for the economy.
Nevertheless, problems remain that threaten to short-circuit any potential recovery.
Foremost is the problem of inadequate domestic demand.
In recent years low consumer confidence has held back domestic demand--Germans have been saving more and holding off spending. That has become the single biggest drag on growth. . . . Unless consumer confidence rises, some analysts argue, there remains a risk that Germany might fall back into a deflationary spiral.
Why are German consumers nervous, despite the improving labor market? Some ideas:
- Structural reforms: "Hartz IV, a restructuring of unemployment benefit and social security. . . . failed to create many new jobs. It has, however, made employees more fearful of the consequences of losing their jobs."
- Looming pension gaps: "Warnings that state-sponsored pensions will fall short are beginning to force people to buy, reluctantly, private pension schemes. But that extra saving does little to help prospects for a consumer-led recovery."
- Stagnating wages: "Some think higher wages offer a solution. On August 8th Mr Schröder urged German businesses that were doing rather better to give their workers a "decent swig from the bottle". Peter Bofinger, a member of the Sachverständigenrat, the government's independent economic council, believes that wages should be allowed to rise by 2% to 3%. Dirk Schumacher, an economist at Goldman Sachs, an investment bank, argues that size and economies of scale should allow large efficient companies to charge more, pay better and still remain globally competitive."
- Underdeveloped consumer borrowing markets: "A good half of German households are already sitting on abundant wealth if their house ownership is taken into account, which it is not by the German Institute for Retirement Provision, notes a recent article in the weekly Die Zeit. If Germans just felt richer, like Americans, they would surely borrow and spend more. Some economists have been urging changes that would make it much easier for Germans to borrow."
- Macroeconomic policy rigidity: "As the biggest economy in the euro zone, Germany has a double straitjacket that prevents it from stimulating a consumption-led boom: interest rates set by the European Central Bank, whose concern is curbing inflation throughout its region, and a stability and growth pact that inhibits countries from borrowing and spending their way out of trouble."
Thus, some of the same factors producing the German business resurgence are also retarding domestic demand growth, indicating the limits to this kind of recovery strategy.
A second problem is reunification -- what to do about the eastern states, where unemployment rates approach 20% or more.
Finally, there is the demographic problem: only 700,000 births in 2004, compared to 1,300,000 in 1960, puts pressure on pension systems and the welfare state as the German population ages.
