SHIFT IN STRATEGY
Consumer spending set to drive economy
Germany is expected to focus less on exports and more on consumer spending.
B7
BERLIN: For decades the image of the archetypal German household has been one of thrifty stoicism in the popular imagination — a stereotype that has been actively encouraged by Angela Merkel, who has often paid homage to the proverbial hausfrau.
But the German post-war economic miracle, driven in no small part by the failure of worker pay to keep up with productivity gains, is undergoing a dramatic shift. With unemployment at record lows and wages finally rising, analysts expect the driver of Europe’s largest economy to move from exports to consumer spending.
As Hans-Werner Sinn, president of Germany’s Ifo institute, said: “Private consumption remains the pillar of the upswing [in 2016] because the income outlook of private households continues to be good on the back of a further improved labour market situation.”
Yet not everyone is convinced that this represents a structural shift away from the mercantilist policies of the recent past.
Although Germany has been seen as a powerhouse economy over recent years, churning out solid GDP growth even as the euro zone as a whole struggled to recover from the financial crisis, in the late 1990s and the early 2000s the country was often called “the sick man of Europe”. Growth averaged 1.2% between 1998 and 2005, while unemployment climbed into double figures.
In the background, significant changes were afoot. In West Germany in the 1980s, a combination of strong labour unions and stringent labour market regulation helped keep negotiated wage settlements high even as the unemployment rate hovered around 8%. That meant, in effect, West German industry was becoming less competitive as labour costs outstripped productivity growth and regulations kept potential workers out of the labour supply.
That all started to change in 1990s with the collapse of the Soviet Union and the reunification with East Germany.
While this led to a period of painful adjustment — from 1993 to 2003 West Germany spent around €900 billion (US$983 million) in net transfers — it also saw the beginning of a recovery in competitiveness that would only build momentum over the next two decades.
Despite the gains in competitiveness, unemployment remained stubbornly high in Germany throughout the 1990s. To combat that, unions and employers negotiated a policy of wage restraint.
As Peter Bofinger, a member of the German Council of Economic Experts, reports: “In January 2000, trade unions and employers’ associations explicitly declared that productivity increases should not be used for increases in real wages but for agreements that increase employment. In essence, wage moderation is an explicit attempt to devalue the real exchange rate internally.”
Coupled with reforms passed in 2002 and 2004 to reintegrate the unemployed into the workforce, the deal allowed German industry to improve its competitiveness against international rivals and to add jobs at the cost of workers’ share of income.
Consumer businesses also cut costs through a policy of domestic outsourcing, where employers used contractors, temp agencies and franchises rather than hiring employees directly. So wages in those industries fell 10-15% compared with similar jobs that were not outsourced.
As with most structural reforms, the impact of the new German model took some time to show. Only in the aftermath of the credit crunch and the euro-zone crisis that followed that did the improvements in German competitiveness that had been building for over a decade allow the country to pull away from its peers, driven by exports.
While euro-zone unemployment remains above 10% over eight years since the start of the crisis, German joblessness has plunged to 4.%, government data show. With the supply of unemployed workers falling and labour demand still picking up, the deal between unions and employers to moderate wage growth has started to fray with higher wage demands becoming much more common.
As a result real wages are increasing at their fastest pace in over 20 years, and Germany’s central bank is reporting lively consumer spending, kindling hopes that Europe’s largest economy could become a major source of demand for weaker eurozone members.
However, nominal wage growth remains surprisingly weak given the apparent tightness of the labour market. This, combined with a run of weak industrial output figures, has raised questions over whether the recent pick-up in consumer spending represents a sustainable economic rebalancing.
“The recent improvement in real wages has largely come from the decline in inflation, driven by the collapse in oil prices,” said Simon Tilford, deputy director of the Centre for European Reform. “The question is whether it will be sustained once inflation picks back up.”