German deficiency

Macro maestro is finding it hard to get excited about today's German GDP release. Sure, 2.2% growth on the quarter is impressive but once again it is likely global demand is driving this rather than anything domestically generated. While we don't have any details on the composition of German GDP, we can get a rough idea by looking at other data from Europe's largest economy.

In particular, while manufacturing orders have surged, strong demand for exports and domestic 'intermediate' goods largely explain this improvement (see chart). These intermediate goods are presumably being used to produce more exports. Crucially, consumer orders remain depressed and have barely recovered from their recession lows.

Repeating the pattern of the last decade, this weakness in German consumption shouldn't be suprising. As in 2005-2008, German consumers are feeling more optimistic (consumer confidence has jumped higher) but are reluctant/unable to spend. A quick glance at wages explains why - after a modest recovery in 2007 as the labour market tightened and German unions became more militant - pay growth promptly returned to its usual depressed levels.

So where does this leave us? Again the situation in Germany is dependent on developments elsewhere - the economy remains geared to the global growth cycle. If global demand contines to grow, German activity might eventually become more balanced. The labour market should continue to impove, so wage growth might rise and the German consumers will probably start to spend. There is also pent up demand for investment. But if the global economy starts to low - and recent indicators in the US and China suggest this has already started - Germany will surely follow.

Those hoping Germany can help sustain global demand look sadly deluded. (Macro Maestro was once one of them but generally tries to learn from his mistakes..)