The eurozone’s economic powerhouse is stuttering. Courtesy of the FT’s Frankfurt bureau chief Martin Arnold this morning:
The German economy shrank as much as 1 per cent in the final three months of last year, as the latest coronavirus restrictions and supply chain bottlenecks kept output below pre-pandemic levels.
The Federal Statistical Office on Friday published initial estimates showing Europe’s largest economy managed growth of 2.7 per cent last year, despite fourth-quarter output falling between 0.5 and 1 per cent from the previous quarter.
Meanwhile, inflation for the year to December came in at 5.3 per cent. Unlike the UK, the US, and euro area counterparts such as France, Germany’s GDP remains below its pre-pandemic levels. That’s despite the country, in terms of pandemic-related health outcomes, faring better than the other three.
Economists agree that most of the blame for its lacklustre performance lies with supply chain bottlenecks. Germany’s manufacturing prowess means that an awful lot of value added comes from its automotive industry, for instance, which has been hit particularly hard by the chip shortage.
Economists, however, are less united on what comes next.
Take ING Bank’s Carsten Brzeski, who is positive that — after a dismal first quarter characterised by supply chain snags, high energy prices and an Omicron wave — we’ll see a strong rebound in output as the weather warms:
The upside to a disappointingly weak growth performance in 2021 is that the economy is fundamentally healthy and once pandemic-related restrictions are lifted and global supply chain frictions abate, industrial activity and with it, the entire economy will lift off again.
Andrew Kenningham of research outfit Capital Economics is less convinced the source of the economy’s troubles will dissipate any time soon:
Prospects for 2022 depend largely on the pandemic and supply chain problems. Omicron is sure to keep consumer expenditure subdued in the near term even though Germany has not yet suffered infections on the scale seen elsewhere. Meanwhile, there is little evidence that supply problems are easing in Germany and indeed the Statistics office said supply bottlenecks would continue for a while. However, improvements in the UK and US are encouraging so we assume that the problems will ease gradually.
Our own view is that the bottlenecks which are hindering German growth, and triggering inflation, will take a long time to clear.
Take the impact of the chips shortage on used car prices.
Some chipmakers began to report excess stock towards the back end of last year, so the picture might — on the face of it — look rosier now than it did a few months ago. But cars require dozens of different sorts of semiconductor chips, not all of which may be readily available just yet. Carmakers are compensating by offering new vehicles that lack some of the features they usually offer. Customers, desperate for a car they’ve been waiting upwards of a year for, might take them. But they might not. Even if chips do become readily available, or customers settle for a vehicle short of a mod con or two, there are substantial backlogs. Order books will take a couple of quarters to fulfil, leaving those who are not on the waiting list having to settle for a used vehicle.
Anyone hoping for a good deal on an old Five Series will almost certainly be waiting a while yet.
Of course, automobiles are not the entire German economy. Weak consumption also weighed on growth. Once the Omicron wave passes, we will no doubt see higher spending on services. That will lift the mood. Still, manufacturing matters far more here for elsewhere — both for output, and even more so for growth.
The real risk is that, if we get towards the back end of this year and bottlenecks (and therefore price pressures) endure, then companies are going to come under a lot of pressure to pass on the costs to their customers and pay their employees more. In the process, higher inflation risks becoming entrenched, denting the country’s longer term prospects.
For now, the workers of the eurozone — including in Germany — have not seen the sort of pay growth that their counterparts on the other side of the Atlantic have. Indeed, negotiated salaries (an important part of the wage bargaining process here) have yet to be impacted by inflation at all. Chart below courtesy of @OliverRakau:
The relationship between labour and capital in Germany is relatively harmonious and collaborative. Unions’ preference for benefits that offer a better work-life balance over higher pay has kept a lid on wage growth too.
The longer the supply chain snags remain an issue, the lower the chance this trend holds. And the greater the likelihood that this once short-term shock begins to have deeper ramifications.
Source: Economy - ft.com
