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Bounding Bierkeller

20 December 2011 By Martin Hutchinson

The Bundesbank’s forecast of a German economy growing a paltry 0.6 percent in 2012 may be pessimistic. If the euro zone stays in place, its troubles may redound to Berlin’s advantage. The euro will stay weak, while Germany will enjoy a finance cost advantage over its neighbours. Next year may thus see German exports surging and economic growth resilient.

Germany’s economic trajectory in 2012 depends on the euro zone’s fate. If it undergoes an orderly split, Germany may lose competitiveness as its part of the euro strengthens against other currencies. If the euro breaks up altogether, massive European debt defaults may cause a Europe-wide recession severe enough to drag down even resilient Germany. If, however, the euro remains in place – which currently appears most likely, even if possibly losing Greece and/or Portugal – Germany will be in an excellent competitive position. Both France and southern Europe, important competitors, will suffer financing costs significantly above German levels, while the euro will remain weak enough to keep German exports competitive in the United States and world markets.

Given this reality, the Bundesbank growth forecast looks too low. While public sectors may well suffer increased financing costs, Germany has a projected budget deficit of less than 1 percent of GDP and hence will suffer less from this than its neighbours.

Global growth is projected at 4 percent in 2012, while U.S. growth appears more resilient than a few months ago. Hence German exports should continue growing at a healthy rate. Domestically, gross wages are expected by the Bundesbank to rise by about 5 percent this year and 3 percent in 2012, while unemployment is forecast to continue declining. That should bolster demand and counterbalance modest public sector austerity. Both internationally and domestically, German growth should prove the Bundesbank’s caution excessive.

There are risks to this forecast. Even if financial collapse is avoided, the euro zone’s demands on Germany’s public purse could weaken its economic position, while calls for Germany to reduce its export surplus also threaten. But Chancellor Merkel, facing a difficult election in 2013, has become an expert in saying “Nein”. That’s a crucial skill to preserve the health of the German economy.

Predictions: Breakingviews is publishing a series of articles over the holiday that look ahead to 2012. The pieces will be collected together in the annual ’Predictions Book’, produced in print and electronic form early in the New Year.


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