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Why German Growth Beat Expectations

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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Germany's unexpectedly strong economic growth at the end of last year stemmed from high domestic demand, even though the government has done nothing to stimulate it and deflation was approaching. So what’s going on? Could it be that the Germans have been right all along to focus on competitiveness, instead of boosting spending?

The German statistics service, Destatis, reported today that gross domestic product increased by 0.7 percent in the fourth quarter of 2014, handily beating analysts' expectations of 0.4 percent. The actual demand growth data have not been published yet, but it's safe to say they will be higher than expected: "Positive contributions were made mainly by domestic demand," Destatis said.

The U.S. Treasury department has long called on Germany to do something to boost domestic demand to help other euro area economies grow faster. In its October, 2014 international economic report to Congress, it gave Europe's economic leader another kick, saying that "measures to increase domestic demand, particularly in surplus countries like Germany, can help further European and global rebalancing." It praised Germany's 2014 decision to introduce an 8.5 euro ($9.6) minimum wage as a step in the right direction.

Yet the minimum wage has only been in effect since January 1, 2015, and then not for all employers and employees. The German government has not developed any other stimulus program: Just as the U.S. Treasury report was published, the economics ministry in Berlin said such measures would not be necessary.  

Meanwhile inflation kept dropping -- from 0.8 percent in October to 0.2 percent in December. It looked like Germany was going to be punished for its fiscal tight-fistedness: Demand would go down because of lower inflation expectations and employers' growing reluctance to raise wages, and the already tenuous economic growth would turn negative.

And yet that didn’t happen. Germans didn’t need help from the government to start spending more. Their incomes kept increasing at a healthy pace -- nominal wages grew by 2.8 percent in 2014 -- and there was no point in saving, because interest rates on deposits were approaching the negative territory. In November, some banks were already charging clients who wanted to park large amounts of money with them. No wonder Germans' savings rate, at 9.2 percent, is near historic lows:


When there is no point in saving and salaries are growing, the most reasonable thing to do is to spend the money. So that's what Germans did in the fourth quarter of 2014.

They will keep spending this year, too. Holger Zschaepitz noted wryly in the daily Die Welt that it will soon make more sense for savers to keep money in bank vaults than on deposits, even taking into account the rent on the vault. And salaries will keep growing. In January, Alison Mandra of the Bruegel think tank in Brussels published data based on the powerful German unions' collective agreements with employers for 2015. Though the numbers suggest a somewhat slower growth rate than in 2014, it will still be much higher than inflation. Wages in construction, for example, are set to increase 2.6 percent in western Germany and 3.3 percent in eastern Germany, while salaries in banking will increase by 2.1 percent throughout the nation.

The low expected inflation -- in January, prices in Germany actually dropped by 0.4 percent -- determines the slower wage growth. Yet unions have extra bargaining power now with export-oriented companies: As the euro’s value sinks amid a global currency war, it becomes more competitive and profits increase. Employers can either share some of that growth with their workers or risk discontent.

Besides, deflation allows people to buy more things on their current income, so long as they’re willing. In the U.K., Bank of England Governor Mark Carney has advised his countrymen to take advantage of the low food and energy prices: "Enjoy it while it lasts, because this will go away over the course of the next year." No one can predict how the oil price will move, so rather than strategize about it, people will just step up their spending for now. Deflation or no deflation, the German economy, propelled by this increased household spending and the growing profitability of exports, is likely to beat the 1.3 percent growth forecast for 2015, just as it has beaten the 2014 consensus of 1.5 percent: according to Destatis, actual growth was 0.1 percentage point higher for the year.

In effect, Saudi Arabia with its refusal to curb oil production as prices fell and the European Central Bank with its commitment to quantitative easing are doing the German government's job for it, allowing it to keep spending down due to suppressed prices and debt service costs, and to generate another budget surplus this year. Still, there's more to the German growth story than that: Other large European countries, such as France and Italy, are stagnating despite getting the same outside help. 

It certainly looks as though Germany has been right, at least for itself, by stressing economic competitiveness rather than fiscal stimulus. Now that the right external conditions have arrived, it is better positioned than its neighbors to take advantage of them.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Marc Champion at mchampion7@bloomberg.net