The results were nothing short of spectacular. While Europe continues to creak under the burden of aching economies like Greece, Spain, Portugal and Italy, Germany has managed to reinvent itself superbly, creating an economic juggernaut that is lifting what was hitherto a lifeless European Union to its fastest growth since 2006. And Germany itself scorched ahead to an annualized growth of 9%, and quarter-on-quarter growth of 2.2% in the second quarter of 2010.
Statistics sometimes are deceptive and misleading. But here, a revealing tale unfolds. A confident Bundesbank, Germany’s central bank, upped its forecast from 1.9% growth to 3% this year following the second-quarter spurt. For an economy that contracted 4.7% last year, Germany has lessons to offer; lessons that Portugal or Spain can learn from. The country is free from any kind of credit crunch crisis although its banks have been fragile – for the foreseeable future at least. And Germany has managed to wriggle itself out of the recession – doing what it does best – it has focused on its strength, its edge in producing world-class engineering and automobile products, and has pushed ahead with wage cuts to rein in labor costs while investing heavily in R&D to restructure the very fabric of its economy.
Germany relies heavily on its export industry to fuel growth. But despite a slowdown in main markets in the EU, the country has worked around the challenge by increasing exports to emerging economies like India and China. The result is that there is a new edge to Germany, a rebirth in competitiveness. Firms have had new business, new orders and with that have increased capital investment, upgrading production plants. Increased production means that unemployment has fallen steadily and inflation has not been hanging like a Damocles sword over Germany’s growth, as it has been in many Asian countries. Of course, a 10% drop in the value of the euro against the dollar this year has helped.
It would be unrealistic to expect Germany to record the same spectacular results in the third quarter as well. Being so heavily reliant on exports can be worrisome, and domestic consumption has not revived enough to counter any slowdown in the export sector. The automotive sector has enjoyed the recent surge, but while automakers like BMW and Volkswagen have benefited from investments and exports to emerging markets, it is telling that sales, for example, of Mercedes have actually fallen within Germany. In fact, the Organization of Economic Cooperation (OECD) has forecasted that consumer spending in Germany will drop 1.4% this year. There are doubts hence as to the extent of economic recovery, but what the second quarter results have shown is that the underlying fundamentals are strong. And unlike in America, which has been beset by anxiety and worry over the state of its own recovery, Germany can at least look ahead to the fact that this year definitely won’t be as bad as the last. In a struggling EU zone, that is a big measure of comfort.
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