Is the IMF wrong about Germany?

Yesterday I cited press reports that the IMF plans to slash its  2006 growth forecast for Germany (though revising up this year's from 0.8% to a still lacklustre 1.0%). This gloominess is in contrast to this week's Economist cover story, Germany's surprising economy (sorry, subscribers only). Of course the Economist can get it wrong, but in this case maybe they're onto something.

The ZEW Indicator of Economic Sentiment for Germany, released today, rose by a substantial +13.0 points in August. It has risen for three consecutive months, and now stands at +50.0 points compared with +37.0 points in July - well above its historical average of +34.3 points. ZEW commented that hopes for a revival are motivated by an increase in incoming orders, especially from the domestic market.

The ZEW index tends to lead the better known Ifo Business Climate Index by a month, so prospects for growth in the second half of 2006 are looking up.

That news compares with today's Federal Statistics Office report that German GDP stagnated in the June quarter, with a jump in imports offseting export growth and improving domestic demand. This confirms the Statistics Office's preliminary August 11 estimate of zero Q2 growth.  (Hat tip: Dave Altig at Macroblog)

UPDATE: Edward Hugh, in his multiple comments below and on A few euros more, sides with the IMF and concludes that "some of the 'optimism' may have been politically driven, and I think as you and I have both concluded, this may have little real foundation".

He also mopes that this post doesn't actually quote what The Economist article said,and he is not a subscriber. So here's an excerpt from this week's editorial/leader for you, Ed, and all the other non-subscribers:

Thanks to the intense pressure that they have been under in the past few years, Germany's big companies have restructured and cut their bloated cost base. This process has for once been helped by the trade unions, which had been a stubborn obstacle to change. ...Thanks in part to this new flexibility, unit labour costs, a benchmark of competitiveness, have fallen sharply relative to other countries. ...that is a big reason why, last year, it regained its position as the world's largest exporter.

Given this corporate turnaround and strong export performance, it is not surprising that both profits and the stockmarket have been rising sharply. More significantly, recent surveys of business confidence have been encouraging. Consumers remain nervous, largely because they are still fretful about their jobs; but, with unemployment now starting to come down, consumer confidence looks set to revive too. this suggests that domestic demand, the weakest link in the German economy, may be poised for a rebound. Indeed, some forecasters are now predicting that Germany, which has for so many years disappointed on the downside, could be about to surprise on the upside.

Also check out Ed's four comments over at the Macroblog post.

Comments

[Edward Hugh]

"Of course the Economist can get it wrong, but in this case maybe they're onto something."

Couldn't we equally say: Of course the IMF can get it wrong, but in this case maybe they're onto something. I'm with the IMF. I don't know what arguments The Economist uses to justify their view since I'm not a subscriber. Perhaps you could indicate one or two of their arguments.

More explanation of my view over at MacroBlog, from whence, via the trackback, I came here. Clever use of trackbacks I think :).

[Edward Hugh]

The FT is more on the Economist's wavelength:

http://news.ft.com/cms/s/98cfe49c-13f9-11da-af53-00000e2511c8.html

But they are prudent, and do put in this insightful quote.

"However, fears Germany’s election system might result in a fractious “grand coalition” between the CDU and Social Democrats may have damped expectations more recently and economists remain cautious about the strength of any German upswing. Holger Schmieding, economist at Bank of America, warned that expectations were fickle and that “the economic upswings heralded by major surges in the ZEW in mid-2002 and early 2004 both turned out to be disappointingly shallow and short-lived”."

So some of the 'optimism' may have been politically driven, and I think as you and I have both concluded, this may have little real foundation.

[Edward Hugh]

BTW Don't miss this. Don't get too carried away with the optimism .).

"U.K. factory orders fell in August to their lowest level since October 2003, adding to signs that manufacturing in Europe's second-largest economy remains stuck in recession".

[Edward Hugh]

More from the bad news department, but still it hardly constitutes a recession, so in that sense the reession seems to be bogged down in the manufacturing sector:

"Britain's leading employers' association slashed its 2005 growth forecast for the economy Wednesday, blaming slower consumer spending and high oil prices.......The Confederation of British Industry said it expects the economy to grow by 1.9 percent this year, well down from the 2.5 percent growth it forecast in May. The forecast is well below the government's target growth range of 3 percent to 3.5 percent."

[Edward Hugh]

"for you, Ed, and all the other non-subscribers"

Thanks, I'm not a subscriber to anything nowadays on principle. I don't agree with the online business model, and I exercise my right not to buy.

However.... if they are plugging how efficient the Germany company is, they are a bit late getting the message. This has been a commonplace on blogs, the FT, MS GEF (yes, Elga Bartsch) for ages. But this means they can export, and win out over the US company (this is the part of John Snows structural reform thing I don't get, since looking at export capacity it seems to be the US company which needs reform, well maybe I'm overdoing it, but there's a point there somewhere). Labour markets are another thing, Germany needs to bring unemployment down.

But Germany's problem (and Japan's) is not export prowess, but internal consumption growth, and this is what we're not getting. So the efficient company won't produce the GDP growth they are looking for. The big question is why these economies can't produce export lead strong internal recoveries, but my guess is they will need to try and fail a couple of times more before people will be prepared to seriously sit down and look at why.

Meantime of course the Ifo comes in today with another gloomy reading, driven by the poor retail outlook.

In the key of c

Where have all the shoppers gone?

Where have all the shoppers gone, long time paaaasing, long time ago, where have ....

"Oh, when will they ever learn, when will they eeeeever learn.

[thomas riccardo]

Germany is the World's largest exporter, exporting over 1 trillion dollars worth of goods a year and rising.
A country that is 1/4th the size of the U.S. and outperforming it by a considerable margin is nothing to ignore. It is the U.S. who has some very considerable problems arising such as an 800 billion dollar current account surplus, a 600 billion dollar Governmental debt including the raids on the trust funds every year, huge corporate debts, huge consumer debts, over 40 trillion dollars in debt not including the S.S. and Medicare liabilities for the retiring babyboomers starting in 2008.
For every dollar of profit in the U.S. economy we are adding over 6 dollars in new debt, now what economic Growth are we speaking of? Printing more money out of thin air and loaning it to the consumers and putting them into great debt, creating huge housing bubbles, credit bubbles, stock market bubbles, we all know what happens to bubble, don't we?
The European Union as a whole has over 40 million manufacturing jobs, the U.S. has 14 million manufacturing jobs and that is why our current account is so large. The biggest problem is the E.U. outperforming our companies. 40 percent of America's trade deficit with China are Japanese and European companies exporting from China so add another 25 percent onto the 130 billion dollar trade debt and it seems Europe is kicking kicking our ass with the Japanese cleaning up.
We have 62 percent of our working age population(18 to 65) working, the E.U. has 63 percent so what is all the crap about the big difference in the employment levels, oh you mean after 6 months and all Americans who have not found a job don't count anymore? And that's if they can qualify for unemployment only 33 percent of Jobless Americans do.
I'm kicking a dead horse, nothing more to say.