Germany: An unusual growth mix
James McCann, European Economist at Standard Life Investments comments on the growth outlook for the German economy.
Germany has taken a few knocks lately. First, its reputation of producing reliable, high-quality goods has been tarnished by the Volkswagen emissions scandal. Volkswagen will face hefty fines, while there could be wider ramifications if the scandal undermines the reputation of other German car makers. Indeed, the ZEW survey of financial sentiment collapsed in October, led by declines in the autos component. There is a risk that this feeds through to investment and hiring in a sector that accounts for nearly a fifth of total exports.
More generally, there are concerns that the German growth model could falter in the current environment. Certainly, Germany looks to be highly exposed to the deterioration in global growth, particularly across emerging markets (EM). Exports stand at a high 46% of GDP and, when measuring trade by value added, we find that 37% of these end up in an EM. Germany had weathered this storm surprisingly well through much of this year, with exports up some 4.7% to July. This reflects strong demand for autos (before the VW scandal), while exporters were able to use a competitive euro exchange rate to boost, market share. However, the summer slump in global trade and production hit Germany hard. Exports fell some 5.2% month-on month, the largest decline since the start of 2009, with this weakness mirrored in industrial production and orders data. It should be noted that these data probably overstate the weakness in the global economy. Indeed, more recent survey data have suggested surprisingly resilient activity in the German industrial sector. However, the scale of the decline serves as a reminder of the sensitivity of the economy to global conditions.