Germany Isn’t Floundering, Despite the Data
(Bloomberg Opinion) -- After Tuesday’s disappointing industrial output data, the German economy could be headed for a technical recession – two consecutive quarters of negative growth. “Technical,” however, is the operative word; the country isn’t really in trouble, at least not yet, and the worrying data are driven by a single regulatory change that has wreaked havoc on the domestic car industry.
The German government reported a 1.9 percent month-on-month drop in industrial production, the biggest since August 2015. Much of that decrease is explained by a 4.1 percent decline in consumer goods production, a catastrophic-looking number not seen in the last seven years. That slump was likely determined by a huge drop in auto sales. The car industry generates 20 percent of total domestic industrial revenue, and new car registrations in Germany tumbled 9.9 percent in November from the year-earlier period.
This development dwarfs other factors that determined the dismal industrial growth numbers in November, a convenient gap between a public holiday and the first weekend of the month and unusually warm weather that necessitated less energy production. It stems from something called the Worldwide Harmonized Light Vehicle Test Procedure (WLTP), a new European emissions test that became obligatory in September. It’s a more stringent test than the old one, and uses actual driving data, rather than laboratory simulations. German companies were woefully unprepared for this. They had to stop offering dozens of models because of certification and retrofitting issues.
Analysts’ models are powerless to predict this damage, and so Germany has faced a whole chain of negative economic surprises, starting with the negative growth in the third quarter of 2018. The entire fourth quarter promises to be awful; in December, new car registrations were down 6.7 percent year-on-year.
The WLTP fiasco has laid bare serious problems within the German auto industry. For too long, it has enjoyed political protection while treating environmental standards as no more than a regulatory nuisance; some companies, such as Volkswagen AG, have paid billions in fines after being caught cheating their emissions tests. But the problem goes beyond VW case: All German carmakers should have seen stricter regulation coming.
This, however, doesn’t mean there’s anything fundamentally wrong with the German economy. Some recent economic surprises surprises, in fact, have been positive. The latest releases on retail sales and consumer confidence beat analysts’ expectations. The unemployment rate, at 5 percent, is in line with forecasts. The factory orders index unexpectedly dropped 1 percent in November compared with October, but orders from inside Germany and from outside the euro area were actually up – it was demand from the eurozone that weakened.
While German carmakers will eventually come to terms with the WLTP, the economic deterioration in the euro zone presents a more long-term problem. After the European Central Bank ended its quantitative easing program last month, the era of cheap, abundant credit is ending. The ECB itself is counting on still-robust domestic demand to keep the euro zone economies from shrinking, but Germany’s export-oriented economy is still vulnerable: about a third of its exports are to the euro area.
So far, the consensus among economists is that growth will merely “normalize” after a prolonged economic boom. In a recent report, DIW Berlin, the economic institute, described a strong, stable, prosperous Germany in which companies are slowly expanding their core workforces even as growth in temporary employment is slowing. Order books are full, and corporate investment is growing. Capacity utilization, though it has dropped a little since last year, is above 87 percent (compared with 78.5 percent in the U.S.). Healthy budget surpluses allow the government to step up investment and make up for any growth shortfalls in the private sector.
Germany has accumulated an insulating level of prosperity in recent years. It doesn’t really have to grow much to maintain it, given the slow growth of its population. And it would take an economic cataclysm in neighboring countries to affect this. So far, the data don’t all point that way; retail trade was up 0.6 percent in the euro area in November, according to Eurostat – a promising sign for Germany’s exporters.
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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