No, Germany Doesn't Need Stimulus After All

(Bloomberg Opinion) -- Now that Germany has avoided a technical recession, posting an economic output growth of 0.1% in the third quarter of 2019, it’s highly unlikely that the German government will deviate from its zero-deficit policy and offer any substantial fiscal stimulus. For now, the country's domestic market has shown an uncanny ability to compensate for external turbulence. But faster growth is only possible if industry starts recovering from its slump.

Based on dismal industrial production data, economists widely expected Germany to register a gross domestic product decrease in the third quarter. The median of 23 forecasts tracked by Bloomberg was -0.1%. But domestic demand, both private and public, has compensated for the weakness in factory orders. 

Two good indicators of that buoyant demand are new car registrations and new housing construction. Germans bought 22% more cars in September 2019 than in the same month the previous year. This reflects the end of the German car industry’s temporary difficulties caused by new emission regulations. 

Sales in the construction sector were up 6.5% year-on-year in the first eight months. In the era of negative interest rates, Germans’ gross household savings rate is still above 18%, one of the highest in Europe, only these days the savings are increasingly going into real estate rather than bank deposits.

It may look somewhat paradoxical that despite a decrease in industrial capacity utilization compared with the recent boom, employment in Germany hasn’t started declining.

There’s no miracle here, though. The Ifo Institute for economic research in Munich estimates that more than 10% of the German industrial enterprises have fallen back on a government program known as Kurzarbeit, under which the government compensates up to 67% of an underutilized employee’s foregone net wages. That’s not an emergency for the German government — its budget remains balanced with no need to take on more debt.  Meanwhile, wages been growing in the service sector and overall, helping spur the healthy consumer demand.

Chancellor Angela Merkel and Finance Minister Olaf Scholz, who resisted calls to rush out a stimulus package when a recession was widely expected, will feel vindicated. Germany can keep its head above water without any extraordinary spending, and there are signs that industry will start recovering in the near future. Exports grew in the third quarter, reflecting improved business sentiment in emerging markets. U.S. President Donald Trump is expected to hold off on German car tariffs at least for another six months. A chaotic, no-deal Brexit is no longer a looming threat.

This doesn’t mean Germany is out of the woods. As Claus Michelsen of the German Institute of Economic Analysis in Berlin points out, industry will be hindered by “meager investment activity.” That means a delayed effect on employment and wages is likely. There are other potential head-winds too. The mood in emerging markets is still highly dependent on Trump’s trade war with China. Perhaps a longer term concern is that reduced capital expenditure in China, and the substitution of home-made goods for imported ones there, will hurt German  industry.

For now, though, even the meager growth Germany has shown — slower than the 0.2% recorded for the euro area as  a whole — makes it hard to justify the mammoth infrastructure projects and significant tax cuts that were discussed after the second quarter output drop was reported. Some kind of external crisis would be required to bring back the stimulus talk; without it, the heavy artillery has no clear target.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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