Life has been a lot tougher in 2012 for selling German manufactured goods overseas
Like Britain, Germany needs to rebalance its economy. But whereas the UK tends to live beyond its means, consuming and importing too much, Germany has the opposite problem. The sharp slowdown in 2012 growth shows just how vulnerable Europe's biggest economy is to events in the rest of the world.
After posting strong growth of 4.2% in 2010 and 3% in 2011, Germany came down to earth with a bump last year. National output expanded by 0.7%, and although Berlin has yet to publish data for the final three months of 2012 the government is pencilling in a fall in gross domestic product of around 0.5%.
Two key factors lie behind the current slowdown. Firstly, life has been a lot tougher in 2012 for German exports. The impressive recovery in 2010 was largely due to global demand for Germany's precision manufacturing goods, particularly the machine tools needed by the bigger developing countries for their industrialisation programmes. That demand cooled in 2012, with the uncertainty caused by the US fiscal cliff row further affecting export sales.
Secondly, the euro finally took its toll both of exports and investment. The sharp contraction in Greece, Spain and Portugal, together with budget cut backs and slower growth in other eurozone member states has not only fed through into weaker order books for German firms; it has also made them more cautious about spending money on new plant and machinery.
Take away exports and investment and there is not a lot to sustain German growth. The price of making German industry ultra-competitive in world markets has been a prolonged period of low wage settlements, keeping a firm lid on consumer spending. Reforms to the labour market and to the welfare state have also ensured that little of the gain from Germany's productivity improvements over the past decade have trickled down to the workers in the form of higher living standards. Unemployment, on the other hand, has come down.
So what happens next? In the short term, the deep slump across much of southern Europe means Germany is at risk of a double-dip recession. For 2013 as a whole, growth is unlikely to be much above 1% and could be lower if the euro crisis persists and the haggling over the budget in Washington continues to cast a shadow over the global economy.
In the longer term, the old challenges remain. Clearly, Germany will be the first European economy to benefit from a pick-up in global demand, as and when that happens. But it would be preferable – for German citizens, for the eurozone and for the rest of the world – if consumer spending and domestic investment constituted a bigger slug of that growth. For that to happen, though, there would need to be a change in the way Germany thinks about economics and its role in the world, and that looks some way off.
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