[credit provider=”Stringer / AFP”]
Despite the Eurozone debt crisis, the German economy has been on a roll, with unemployment at a 20-year low. Exports grew 12% in 2011 and surpassed €1 trillion for the first time ever.In 2012—based on demand from Asia, Latin America, Africa, and Eastern Europe—exports are expected to grow 6% to €1.139 trillion—when GDP is only €2.37 trillion ($3.1 trillion)!
But during the financial crisis, export orders fell off a cliff, causing GDP to plunge 2.1% in the fourth quarter of 2008 and a horrid 3.8% in the first quarter of 2009. Annualized, those two quarters printed a double-digit decline in GDP. The worst two quarters in the history of the Federal Republic. The German economy lives and dies by its exports.
The recovery, however, was steep. So it’s perhaps just natural that gloating would infect the German media when, from their perch of success, they look at the economic mayhem in other parts of Europe. Even the Handelsblatt falls pray to it from time to time. I bookmarked its October 17 article, The German Success Recipe Is Called Industriousness and Boredom, because it was just too much. Now the first shadows have appeared, and the “German success recipe,” despite its strengths, might turn out to be a blip.
(The French economy is already in trouble—though Michel-Edouard Leclerc, CEO of the second largest retailer in France, has a somewhat unorthodox solution. For more, read…. French CEO About Ratings Agencies: ‘We Have To Shoot All These Guys’.)
Throughout the 90s, following its reunification, Germany was the “sick man of Europe,” marked by growing unemployment, stagnation, and lacking innovation. The dotcom euphoria bypassed it. A new income tax to fund the rebuilding of East Germany didn’t help. Wages came under pressure. Industry restructured. But rather than venture into the “new economy,” companies specialised in unglamorous but profitable niche markets, focused on high-quality manufacturing, got rid of unprofitable operations, and largely avoided growth through acquisition. Revenues barely budged, hence the stagnation. But it did create a modern export-oriented industrial foundation with some unique features.
Federal and state agencies support the international endeavours not only of coddled multinationals like Siemens and VW but also of family-owned mid-size enterprises that form the core of German industry. For example, the Chamber of Commerce, a federal agency, has branches all over the world to support German companies in doing business overseas. It’s all part of “Deutschland AG.”
Quarter-to-quarter thinking (short-term-itis) is less prevalent among German managers, particularly of mid-size companies that are often closely held and can afford strategies that don’t immediately translate into upticks of their stock price.
While companies might not be able to lay off employees easily, they can cut their pay in half and reduce their hours. The government makes up half of the cut. Thus, employees get a 25% cut in pay, instead of being laid off. The government doesn’t have to pay unemployment compensation. Disruptions, morale problems, and dislocations that result from layoffs are mostly avoided. The company remains fully staffed with experienced people whose technical skills are up to date. As orders come in, hours and pay can be ratcheted up as needed without the expense and delays of having to hire and train new people.
So when the trillions that central banks printed during the financial crisis sloshed around the world and created demand in China and other developing nations—and eventually in the US and Europe—German companies were ready. Thus the miracle-like recovery from the abyss of the first quarter of 2009.
But now factory orders are plunging again—4.8% in November (reported January 6), nearly wiping out October’s surge of 5%. In September, they’d fallen 4.3%. In August, they were down 1.4%. In July, the were down 2.8%. In November, domestic orders eased 1.1%, orders from the Eurozone declined 4.1%, and ominously, orders from countries outside the Eurozone plummeted 10.3%.
Clearly, the “German success recipe” will be tested in 2012. If there are more declines in export orders, GDP will take a significant hit, even if the Eurozone makes it through the year intact. Which is by no means certain. Greece is already teetering after five years of recession and 17.7% unemployment. Troika inspectors are on their way … to demand yet more cuts. And the Prime Minister threatened everybody with the nuclear option. For more on the whole debacle, read…. Greece’s Extortion Racket Is Maxed Out.