Bundesbank sounds the alarm
Germany's central bank has warned that economic growth in Europe's largest economy is weakening, due to the eurozone crisis and problems across the world economy.
In a new monthly report, the Bundesbank said that German firms are more worried about Germany's future prospects. It points to the slowdown in China, Japan's now-shrinking economy, and fears over the US fiscal cliff.
The full report is online here (pdf, in German), and Reuters provides a translation of the key points:
The economy currently presents a mixed picture, which is likely to cool further towards year-end...By now it has become unmistakable that the disturbing external factors are affecting the willingness to invest and job planning so strongly that the whole economy could be affected.
Last week's economic data showed that German GDP rose by 0.2% in the third quarter of 2012 – the question is whether it shrinks in the last three months...
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The underlying weakness in the US, European and Japanese economies was underestimated in China’s forecasts for 2012. The US is currently consuming more capital than it creates, while its percentage of investment in GDP is near post-World War II lows. Japan’s investment levels have declined for two decades while its savings rate has fallen. EU investment is the lowest percentage of GDP since World War II and declining. These economies cannot achieve rapid recovery under such conditions.
Weakness in Western economies can to a certain degree be compensated for by China’s export growth to developing countries as the latter now constitute 53% of China’s exports. But as Western economies still account for almost half China’s current global market the growth prospects for China’s exports are structurally limited. Consequently, as the great majority of analysts conclude, China’s economic expansion in the next few years must be based primarily on domestic demand. It is therefore good news for China’s economy later this year that lessons drawn by China’s economic policy makers have begun to overcome some confusions which existed earlier regarding the dynamics of China’s domestic demand. This process has been aided by policy recommendations by Lin Yifu - China’s former World Bank Senior Vice President and Chief Economist
These two goals are actually contradictory as GDP growth, which is largely fueled by investment, underpins sustainable consumption. Sharply increasing consumption’s percentage in GDP cuts investment levels, thereby inadvertently leading to lower GDP and consequently lower consumption growth.
The practical consequences of this confusion were clear in 2012. To attempt to raise the share of consumption in China's GDP, wage increases far above the economy's growth rate were pushed through. In the most striking examples, Sichuan raised the 2012 minimum wage by 23 percent, and Shenzhen announced a 16 percent increase to the 2012 minimum wage following a 20 percent increase in 2011.
Such measures increased inflationary pressures in China’s economy and squeezed private and state company profits, helping create in the first half of 2012 a trend accurately termed ‘profitless growth’. Falling profits in turn led to investment reductions, with fixed asset growth declining from 25.0% in August 2011 to 20.2% in August 2012. Falling economic growth also reduced government tax receipts, pressuring the state budget.
World share prices have also not significantly risen above their April 2011 post-international financial crisis highs – see Figure 3. However this graph also illustrates the sharp difference between US and non-US share price performance.
US shares have continued to advance since April 2011, more than overcoming their decline in the second half of 2011. Non-US shares have, however, fallen back from April 2011 levels.
Whereas up to April 2011 US and non-US share markets moved in the same direction, both showing recovery, since April 2011 US and non-US share markets have moved in opposite directions with the former having risen and the latter fallen.
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