The ongoing German recovery

Here is the latest:

Factory orders in Germany, Europe’s largest economy, unexpectedly increased in May, led by domestic demand for investment goods such as machinery.

Orders, adjusted for seasonal swings and inflation, increased 1.8 percent from April, when they surged a revised 2.9 percent, the Economy Ministry in Berlin said in a statement today. Economists had forecast a drop of 0.5 percent, according to the median of 33 estimates in a Bloomberg News survey. In the year, orders rose 12.2 percent, when adjusted for work days.

That is a funny result for a country committed to a near-balanced budget by 2016 and it shows the continuing importance of real factors for economic recovery.  Mind you, this may well end badly, but for broader European reasons, or perhaps because of problems from the Chinese economy.

From Michael Burda and Jennifer Hunt, here is a very useful paper (newer, better, and gated version here) on why German labor markets have done so well in the Great Recession:

Germany experienced an even deeper fall in GDP in the Great Recession than the United States, with little employment loss. Employers’ reticence to hire in the preceding expansion, associated in part with a lack of confidence it would last, contributed to an employment shortfall equivalent to 40 percent of the missing employment decline in the recession. Another 20 percent may be explained by wage moderation. A third important element was the widespread adoption of working time accounts, which permit employers to avoid overtime pay if hours per worker average to standard hours over a window of time. We find that this provided disincentives for employers to lay off workers in the downturn. Although the overall cuts in hours per worker were consistent with the severity of the Great Recession, reduction of working time account balances substituted for traditional government-sponsored short-time work.

I would add one factor.  Germany didn’t have much of a real estate bubble and the Great Recession arrived on its shores, in part, through export markets.  Global export markets collapsed quite rapidly, but they also recovered fairly rapidly (ask Singapore, and here).  That made the German recovery easier.  It also helped their labor market policies.  Germany didn’t encounter much of a “recalculation.”  Demand went and then demand, for more or less the same things, came back.  The political strategy of “freezing” the jobs and trying to preserve the informational capital in those relationships was set up to work fairly well, which it did.


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