Excellent Results from Germany and China Raise Questions About the Basis of Growth

The current crisis has shown that classical concepts of demand no longer hold. Consumption has become a very flexible term whose effects are no longer so simple to predict as they once were. Some spend, some tighten, some produce, some do not produce. And yet – everyone is supposedly growing.

writes Vanja Figenwald

The somewhat slower summer pace has not reflected on the industrious Germans who have provided Europe, otherwise a rather depressing place lately, with its first truly good news. The German machine, in its usual steadfastness, managed to achieve almost revolutionary growth, significant and large even in objective terms, not just in the given conditions of low benchmarks. The cause of the general euphoria and a flood of panegyrics to wise and reliable Germany is a growth of 2.2 percent in the second quarter of yet another dismal crisis year compared to the previous three months. Others in the European Union have thus recorded a growth of one percent on the wave of the German export explosion, which, however, only qualifies as a success at the Union level. The German success is greater in that it ‘tows’ other members with much more modest results on its back, such as France, for which a 0.6 percent jump is like from Earth to the Sun, but also those very problematic ones whose fate is still quite uncertain, for example, the Greeks, Spaniards, Portuguese, Italians, British, and Irish. Besides being the first serious success in Europe after a long time, the German boom is also the largest since reunification in 1990 and would amount to more than eight percent on an annual basis.

Evidence of a lasting recovery

The atmosphere of surprise has been joined by America and Britain, each in its own way. The former has slowed to only 0.6 percent compared to the first quarter after a much more aggressive exit from recession, while the latter has finally achieved a somewhat more impressive result – a growth of 1.1 percent. The naughty boys of the monetary union, Greece, Portugal, and Spain, continue to struggle with their economies and do not provide much reason for optimism. Greece continues to sink just like, say, Croatia, with a quarterly decline of a further 1.5 percent, the seventh in a row, while Spain and Portugal have barely managed to pull off some 0.2 percent growth. Despite the German success, many remain cautious and somewhat skeptical when it comes to the longer-term recovery of the Union. The bombastic results are attributed to one-off factors such as strong winter demand, a low euro, and Asia’s recovery, and the skepticism about the continuation of such a good trend is based on the absence of a relevant recovery in domestic demand, which for some reason is still considered an indicator of a more lasting recovery. Indeed, if the crisis has shown anything, it has shown that classical concepts of demand no longer hold. Seeking evidence of a lasting recovery in domestic demand in developed markets seems somewhat misaligned with changes in the global economy. Moreover, as can be seen in various data, consumption has become a very flexible term whose effects are no longer so simple to calculate as they once were. Some spend, some tighten, some produce, some do not produce. And yet, everyone is supposedly growing, so the skepticism about the durability of such a recovery is easier to understand when things are set up this way.

Japan dethroned

Another news that has occupied the headlines of many world media is China’s overtaking of its eternal rival Japan, which not long ago seemed unimaginable, and its emergence in second place on the list of the largest economies in the world. Disappointing Japanese results, with a growth of only 0.1 percent in the second quarter, and the unstoppable rush of the Chinese locomotive have allowed that country yet another confirmation of fundamental changes on the global stage. Explanations for Japan’s underperformance revolve mainly around insufficient external demand for Japanese exports, primarily to China as its main trading partner. Germany has enough demand, Japan does not. The largest exporter, car buyer, and steel producer globally plays a role similar to Germany’s role in Europe, but the slowing recovery of the giants shows that China and its demand will not be enough to save the world’s heavyweights. The question is, however, what will be enough. Japan held its second place for a long 42 years, but even its economic miracle has expired, following the first stumbles back in the 80s and 90s when it faced a real estate bubble and a subsequent stagnation lasting 10 years. The example of Japan’s entrenchment in second place also shows that taking first place is not as easy a task as it seems. The American economy is still significantly larger than the Chinese, and the gap in GDP per capita is enormous. Despite the large number of billionaires in constant growth, China’s accumulation of wealth is still extremely uneven.

Distribution of wealth

However, the problem of wealth distribution is not specific only to China; it is embedded in the system. The Germans are not particularly optimistic, and according to a recent survey, as many as four out of five Germans claim that they see no benefit from the alleged recovery, and it is concerning that in just 10 years, from 1998 to 2008, the share of low-income workers in that country increased by 5.5 percent to 21.5 percent, which is a huge jump compared to other developed countries like America and Britain. The Japanese, on the other hand, are divided regarding the fall to third place. Half of them see it as a big problem, while the other half does not think anything has particularly changed. In the case of Japan, there is also increasing talk of a double-dip recession, and this sentiment can extend to the rest of the developed world, whose recent successes have not yet convinced many of the durability of the recovery. After all, the data is somewhat confusing. For example, Germany produces and exports but does not spend, and it grows. China exports and spends more and more, not enough for Japan’s growth, but supposedly enough to pull some other economies out of recession, and it grows. Other European countries do not produce much and have stopped spending, yet they record modest growth. America occasionally produces and spends, at least within the framework of fiscal stimuli, and it grows, so the question is who actually spends and what exactly this growth is based on. When everything is added up and subtracted, it turns out that China is in the best position, while the others are on shaky ground, walking in a completely unpredictable direction.