German Consumers Become Surprisingly Upbeat
Jacques’ Wine Depot in Kronberg, a sleepy Frankfurt suburb, does not usually open until 3 pm on a weekday. But it has lately been opening its doors before then, and by early afternoon customers are tasting wines and making purchases. Michael Gay, the manager, recently moved his highest-priced bottles to a more prominent position.
“I’ve noticed how relaxed people are about these wines – and the prices,” he says. Fine Bordeaux examples are doing particularly well. “The mood is good.”
This is not supposed to happen in Germany, a country notorious for its parsimonious consumers and tough retail environment; the average amount spent on a bottle of wine in non-specialist shops is only about €2 ($2.70). But the surprisingly upbeat mood of German shoppers could have big implications for Europe, at a time when the continent’s 12-year-old monetary union has been beset by crises – first in Greece and now Ireland.
As the continent’s biggest economy has recovered from last year’s global downturn, something has changed. In the eyes of many outsiders, Germany is an export-led economy engaged in a “beggar-thy-neighbor” strategy to boost its competitiveness while failing to buy much that is made anywhere else (including wine). But just at the moment when continental Europe needs a powerful motor of economic growth, evidence is emerging of a significant German rebalancing.
Although exports are still playing an important role, with the surplus over imports accounting for almost half of growth in the third quarter of this year, the recovery has become more broadly based. Companies are investing more at home, government expenditure has boosted domestic demand more than commonly supposed, unemployment is falling sharply and even consumer spending is flickering into life.
“Whatever you thought about German export dependency previously, you should admit that since Lehman, Germany has lent a lot of support to the world economy,” says Holger Schmieding, chief economist at Berenberg, a Hamburg-based bank.
Robust, more balanced German growth would come in the nick of time. Berlin faces pressure from Washington to reduce its trade surplus as part of global efforts to unwind economic imbalances. Within the euro zone, a stronger German economy is needed to help weaker neighbors – especially countries such as Spain and Ireland, where rapid growth fuelled by property booms over the past decade has given way to entrenched recession-like conditions. “Now Germany can help Spain. You could not have planned it better,” says Mr Schmieding.
On Tuesday, a survey showed jobs growth in German manufacturing this month was the fastest in more than a decade, while the country’s statistical office said consumer spending had increased by 0.4 percent in the three months to September, the third consecutive quarterly rise.
But will the rebalancing go far enough to make a real difference? German economists at least are confident the upswing is soundly based. Gross domestic product expanded by 0.7 percent in the third quarter, extending a 2.3 percent jump in the previous three months – the fastest quarterly rise since unification in 1990. That puts the economy on course to grow by nearly 4 percent over the year as a whole.
Much of the credit belongs to Gerhard Schröder, who was Social Democrat chancellor in the early years of this century. At a time when the economy had stagnated and long-term decline appeared to have set in, he oversaw controversial reforms that increased the flexibility of the labor market (though it cost him the chancellorship). Around the same time, business was restructuring to cut costs. Labor costs were – and remain – high but relative competitiveness improved dramatically as unit labor costs soared elsewhere; Germany’s labor market suddenly looked again like a model for others.
When the failure of Lehman in September 2008 stunned the world economy, Germany’s export dependency meant it was hit worse than many other countries. In 2009, GDP fell by almost 5 percent. But “when the crisis abated, when we had stabilized the banking sector in spring 2009, Germany reconnected to the earlier positive dynamism”, says Thomas Mayer, chief economist at Deutsche Bank.
Stimulus measures equivalent to a larger share of GDP than in most other European Union countries helped restore growth. In particular, government subsidies allowed companies to hoard labor rather than fire workers as in the US. But the sustained fall in official unemployment, which was below 3 million in October for the first time in 18 years, shows the underlying strength of Germany’s economic model, says Mr Mayer.
“In the UK and US, we are now finding out that there was too much expansion of the non-traded sector – too many people in construction, too many people in real estate and you could even say too many people in finance ... There was no need after the crisis to rebuild the German economy.”
When Germany was reforming its economy, domestic demand was flat. Now, investment spending is rebounding, albeit from a low base. Incomes are also rising. Inflation-adjusted wages were 2.3 percent higher in the second quarter than a year before, according to the federal statistics office. Business organizations are complaining of skills shortages. Siemens, the industrial group, started a trend this month by announcing one-off bonuses of up to €1,000 for local staff and bringing forward by two months a planned 2.7 percent pay rise.
All of that should, in time, feed through into stronger consumer spending. No one, however, is holding their breath. Economists have called a revival in German consumer spending many times in the past – only to be disappointed.
“Everything here is seen more in shades of darker grey than elsewhere,” says Alexander Margaritoff, chief executive of Hawesko, the company behind Jacques’ Wine Depot. “Germans are always afraid about what is going to happen in the next few years, especially as they get older. They are also pretty disciplined – it would never occur to them to live beyond their means, as it has to some of our southern neighbors and American friends.”
Eckhard Cordes, chief executive of Düsseldorf-based Metro, one of the world’s largest retailers, adds: “Let’s be honest – the German consumer is and remains a difficult animal. In the past, retail sales have neither soared nor nosedived on the swings in German macroeconomics but have always been ‘reassuringly stable’.”
But in the past few years, such stability has been good news, underpinning economic growth. While the US and UK saw steep falls in consumer expenditure, spending in German shops remained steady. All the factors that should determine consumer spending in coming months and years – jobless totals, pay packets, consumer confidence – now point in the right direction.
Germans have suddenly become “the optimists of Europe” in terms of propensity to purchase, says Klaus Wübbenhorst, chief executive of GfK, a consumer research organization. “We will take that following wind into 2011 ... Normally when you talk about consumer sentiment we are always in the bottom third [in Europe], if not right at the bottom.”
Michael Heise, chief economist at Allianz in Munich, adds: “I’m absolutely positive that consumer demand is on a steady upward trend, because of the strong performance on unemployment and higher wages.” Optimism among retailers is near the highest levels since the post-unification boom, according to surveys conducted by Ifo, the Munich-based economic institute.
The government’s economic advisory council this month forecast that consumer spending would rise by 1.6 percent next year – a boom in German terms. “Stronger domestic demand means not only insurance against uncertainty in export sectors, but will at the same time contribute to reducing international imbalances,” it argued.
Could Germany really save the world? So far, it is possible only to say that the trend is in the right direction. Domestic demand returned to the pre-Lehman level by the second quarter of this year, even though GDP overall was still 1.5 percent below its pre-recession level in the third quarter.
Dirk Schumacher, economist at Goldman Sachs, says the country’s current account surplus, which peaked at 8 percent of GDP at the end of 2007, should next year fall below 4 percent – the level that Tim Geithner, US Treasury secretary, wants to be the maximum allowed.
“Germany never exported too much. The problem was always that it imported too little – and it looks like that is changing,” says Mr Schumacher. He estimates domestic demand will account for about half of German growth this year and two-thirds of it in 2011.
But the improvement could prove temporary, especially if the global economy slows. “It is over-egging it to say that Germany has become a dynamic growth motor for the rest of Europe,” says Simon Tilford at the Centre for European Reform, a London think-tank. “If foreign demand for German products falls, we could see a renewed push by German companies to reduce wage costs and renewed stagnation of domestic demand.” Whatever benefit Ireland was enjoying would be thrown into reverse.
Even in a best-case scenario, Germany seems unlikely to power global or European growth by running current account deficits. “We have a rapidly ageing population and as in private life, when you are getting old, you are not a natural big borrower – you do that when you are young,” says Mr Mayer at Deutsche Bank. “How can you be a locomotive for the rest of the world when you have an ageing population?”
The biggest impact so far has been on eastern Europe. Poland’s economy is growing as fast as Germany’s this year, thanks in part to booming business from its neighbor. “Ireland’s biggest export markets are the US and UK. Stronger German growth should offer some support, although it is not a game-changer in itself,” says Nick Matthews at Royal Bank of Scotland.
Still, Germany’s imports from France and Spain were almost 25 percent higher in the three months to August than a year before. While the news out of Ireland and Portugal may be all about the crisis gripping the euro zone, Mr Schmieding reckons that “the very fact that the heart of Europe is beating again will have confidence effects across the continent”.
For now, Germans are toasting the economic upswing. The retailers’ association expects the best Christmas in five years. At Jacques’ Wine Depot, Mr Gay thinks the stream of customers will build: “I’m really optimistic about our Christmas business.”