Defying the Euro Crisis
Will German Growth Stall in 2012?
Ever since she became the managing director of the International Monetary Fund (IMF) last July, Christine Lagarde, 55, has been lamenting the state of the world economy.
The Frenchwoman recently said that the outlook for the global economy was "quite gloomy" and that if the international community failed to act decisively to halt the downward trend it could lead to a great depression such as the one in the early 1930s. "There is no economy in the world that will be immune to the crisis," she said.
That is true. Nevertheless, there are countries that are doing better than others despite all the current global difficulties -- and this includes Germany, the core of the ailing euro zone, which Lagarde has pointed to as the cause of the current problems.
Most leading indicators and economic statistics in Germany point toward an improvement for the coming year. Wages and salaries are expected to rise in 2012, as is the number of jobs. Exports are predicted to continue to grow along with domestic demand.
There's a growing sense of optimism among German companies and consumers. The Ifo index, which measures German business sentiment, has been rising again for the past two months and the GfK consumer confidence index also rose in December. It looks as if the Germans are ignoring all the dire predictions.
Over the past year, the German economy has already shown itself to be astonishingly resilient amid the global economic turmoil sparked by the euro crisis, the sluggish recovery in America and a weakening of economic growth in China. Germany's gross domestic product (GDP) rose this year by approximately 3 percent, much more than in neighboring countries and in the US and, more importantly, far more than in the crisis-stricken peripheral countries of the euro zone.
In fact it's been a record-breaking year for the German economy. This year, German companies exported goods worth over 1 trillion ($1.3 trillion) -- the highest figure ever. The number of people in work has also risen to 41.6 million, more than ever before.
Germany's economic success does not make the country more popular among its neighbors, though. After all, this is the same country that has been blocking all proposals to use the European Central Bank (ECB) to provide more generous financing for embattled euro-zone countries. Some European countries appear to be secretly hoping that Germany, Europe's economic paragon, will also soon feel the brunt of the crisis.
In effect, the question is how long the export-driven German economy can elude the downward economic spiral that has affected many regions of the world. The economy is shifting down a gear around the globe, not just in the US and China, but also in the debt-ridden euro-zone members, which are the main customers for German companies. Austerity programs in these countries are curbing growth.
Still Doing Comparatively Well
The Germans are not immune to this development either. Economic research institutes and bank economists are revising their forecasts downwards from week to week. Nevertheless, the German economy is still expected to grow over the coming year, albeit at a slower rate. The most recent forecasts range from 0.3 to 0.6 percent.
But even if growth will be modest, Germany is still doing rather well compared to the rest of Europe. Other European countries, such as France, are on the verge of a recession -- and the southern euro-zone crisis states are already seeing their economies shrink.
Germany is primarily able to defy the downward trend thanks to its dynamic flagship industries. For instance the electrical and electronics industry is anticipating continued brisk business in 2012. The German Electrical and Electronic Manufacturers' Association (ZVEI) expects growth of 5 percent and sales amounting to 190 billion. "We've just completed an outstanding fiscal year and we're about to begin a record year," says ZVEI head Klaus Mittelbach.
The mechanical engineering sector is also brimming with self-confidence. Hans-Jochen Beilke, chairman of the board of Ebm-Papst Group, which manufactures electric motors and fans, is extremely satisfied. His employees in the southern German town of Mulfingen make components such as fans for energy-saving refrigerators and blowers for silent kitchen exhaust hoods, and his company's products are found everywhere from Rome to Beijing. "Things went extremely well last year," says Beilke, "and we're also optimistic for 2012."
The German Engineering Federation (VDMA) is forecasting 4 percent growth for its members. "There's currently an upbeat mood in the mechanical and plant engineering sector," says the organization's chief economist, Ralph Wiechers, "even though there are clear signs of decreasing demand." This year the sector reported a 14 percent increase in production. The forecast for 2012 is significantly lower, but that's "no sign of a crisis," says Wiechers. "Following the sharp drop in production a few years ago, many manufacturers were recovering from low levels. They had a lot of catching up to do," argues Wiechers. "The sector normally doesn't experience such extreme fluctuations."
Ready for a Crisis
German car manufacturers BMW, Daimler and Audi even had to shorten the usual break in production during the Christmas season because they have so many orders to fill. Their plants are operating at capacity.
But that's just the current situation. "We don't know exactly what lies in store for us in 2012," says BMW CEO Norbert Reithofer, who has warned his supervisory board that sales may drop in the near future. At their last meeting of the year, he presented three scenarios: What will happen if BMW's sales drop by 60,000 or 100,000 or even 200,000 vehicles in 2012? The answer: not much. Such a crisis would not be a crisis for BMW.
The Munich-based carmaker could easily absorb a possible decrease in sales. Thanks to numerous extra shifts, many workers have accumulated overtime hours in their so-called working-time accounts (an instrument used by some German companies to give themselves flexibility during economic slowdowns). If production has to be reduced, the workforce can simply take some time off. BMW has significantly more equity and liquidity than it did in 2008, when sales plummeted in the wake of the Lehman Brothers bankruptcy. "We're prepared," says Reithofer.
Reithofer's counterparts Dieter Zetsche at Daimler and Martin Winterkorn at Volkswagen also don't see any serious threats looming on the horizon for their companies. The automotive bosses assume that sales will decline in Europe. But the three German manufacturers hope that they can largely offset this with rising sales volumes in the US, China, India, Russia and Brazil. "There is no reason to assume there will be a crisis scenario," says Daimler boss Zetsche.
Small and medium-sized companies, the backbone of the German economy, are also entering the new year with confidence. According to a report on a survey conducted by the German Chambers of Industry and Commerce (DIHK), "small and medium-sized businesses continue to rate the economic situation as exceptionally good." Companies say that their order books are well filled and most German firms are satisfied with their workload. The results also showed that 44 percent rated their economic situation as "good," while only 9 percent felt it was "poor." According to the study, "the tumultuous developments on the stock exchanges and the sovereign debt crisis are not reflected in the economic reality of large segments of the small and medium-sized business sector."
Furthermore, 23 percent of the small and medium-sized companies surveyed expect business to be even better in 2012 than this year, and only 16 percent anticipate poorer results. Their willingness to invest also matched up with these findings: Some 26 percent of small and medium-sized businesses intend to invest more next year, while 16 percent plan to invest less. The general positive mood is also apparent on the job front. Small and medium-sized firms intend to create some 200,000 new jobs next year.
The strong competitiveness of German companies is behind this positive situation -- and that's unlikely to change in the near future. Although wage agreements are higher than in previous years, they're not so high that they rob German companies of their competitiveness.
On the contrary: Collective bargaining agreements are currently having a beneficial effect. Since employees are now earning more money, they make more purchases. What's more, approximately half a million new jobs were created in 2011. Both factors combine to boost consumption which, together with investments by companies, will also bolster growth in the coming year.
Unemployment in Germany is expected to continue to decline by over 100,000 to some 2.8 million. This is due to new jobs and demographic change. More older individuals are retiring than are being replaced by young people entering the workforce. The greatest concern facing small and medium-sized businesses is not problems like the faltering global economy, but rather the growing shortage of skilled workers.
Germany's fellow members in the euro club can only dream of such problems. The crisis-ridden states of Ireland, Portugal, Greece and Spain are stuck in a slump. Austerity measures imposed by the European Commission and the IMF are strangling economic activities in these countries. Growth is not expected here until 2013, at the earliest.
Italy and France, the two largest economies after Germany in the euro zone, are also facing a possible downturn. Economists predict that France's economic output will shrink in the final quarter of 2011 and the first quarter of 2012. This would fulfill the classic definition of a recession.