Why is consumer demand so weak in Germany?
Wall Street Journal
OECD data
Work
a) Investment in Germany is now lower about 2% of GDP lower than investment in the US. But I would guess that higher investment in housing accounts for most of the difference ... and I am not sure all the capital now being invested in the US housing stock is the best use of available resources. Investment in tradable production is probably higher in Germany. The composition of investment may matter as much as the level. Higher investment in Germany’s export sector may not help with global rebalancing; what is needed is a surge in investment in Germany’s non-tradable sector.
b) The flexible US labor market has not generated all that impressive employment growth recently. The US has had trouble generating sustained real wage growth, at least for the average worker. Economists are a bit of an exception -- Jessica Vacellaro pointed out in the Journal on Tuesday, earnings for economic teachers in the US have risen far faster than earnings for most other workers since 1997. Strong domestic demand growth in the US has not coming from rising labor income, particularly for those not in the top 20% of the income distribution, so much as falling household savings. And falling household savings has been intimately linked to housing appreciation.
What distinguishes Germany is that it -- unlike many other European economies -- has not experienced a sustained increase in housing prices. That probably goes further than anything else to explain why German domestic demand growth has lagged not demand growth not just in the US, but also demand growth in Spain, France and even Italy (see table 2 of the April WEO statistical appendix).
In other words, global rebalancing would be a lot easier with a German housing bubble.
I tend to think that there is a good chance growth in Germany will pick up over the next few years - no matter who wins the election. The long hard slog needed to cut German labor costs may be close to over. At some point, German export success - success that has come in the face of a rising euro -- is likely to spillover and start to generate domestic demand growth. I agree with Martin Wolf here, as elsewhere:
Divergences in productivity performance and wage behaviour have generated huge cost divergences. Germany‘s real effective exchange rate has depreciated by about a sixth against Italy’s since 1999. In turn, the volume of Germany’s exports of goods and services has risen by a stunning 47 per cent between the first quarter of 1999, when the euro was launched, and the end of last year. Allegedly uncompetitive Germany is the world’s largest exporter. .... When Germany’s domestic demand starts to pick up again, its economy is likely to do well.
The risk, of course, is that a slowing global economy - and a slowing US economy - will drag German export growth down before Germany domestic demand growth picks up,
Of course getting demand growth growing in Germany will be a lot easier if the ECB keeps rates low, and lays the foundation for an eventual rise in Germany housing prices. The obvious downside: the low rates needed to support domestic demand in Germany may not be quite what say Spain - with surging housing prices and strong domestic demand growth - needs. ....
Martin Wolf’s latest analysis