I translated the following article from the German daily (Sueddeutsche Zeitung, 1,15 M copies/day, i.e. #1). I wanted to post Sat, but (duh...) my line went dead - and is still dead after 36 hrs. The translation is a little wooden (blame it on babelfish;). The message comes through thou, I hope.
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On the way into stagflation
By Helmut Maier-Mannhart , Sueddeutsche Zeitung 136/21 16.june 2001
What’s going on in Germany? In the past years of the european economic upswing the country together with Italy made the tail lights in the European economic situation train. Now however it changed to a locomotive, taking lead unfortunately in the false direction. The growth is slowing faster than in any other euro state. The recent data by European statistics authority EUROSTAT confirmed that the gross domestic product in the union grew by 2,5 percent year to year in the first quarter. Germany, however, made it only to 1,6 percent, moving thus to #1 position of the downward movement.
And, if the signs are read correctly, some more bad news are on the horizon. It is no more unthinkable that in the second quarter even this meager growth dies off and make place for stagnation. The conclusion of economic situation experts, in view of slowing orders and production at the beginning of the quarter, is that this possibility can’t be ruled out anymore. The manufacturing in the processing trade decreased again in April by 1,5 percent, after the minus of 1,7 percent in March. Even higher, i.e. around 2,9 percent, was the decrease in the investment goods area. They are in Germany traditionally the backbone of the industrial production. The building industry, already in crisis, had to register a first quarter decrease of around 14 percent.
How deep is the valley?
No wonder then that the research institutes and the economical departments of the banks recalculate almost daily, how this development could affect the year. Meanwhile nobody believes any more in the two before the decimal point, except for the Federal Government, whose minister of economics has nothing better to do than deplore the fact the experts keep adapting their prognoses to the constantly deteriorating situation. Current estimates for the year 2001 are 1,3 to 1.5 percent growth at present. Even these numbers may not be the last word, if the German economy decides middle of the year for stagnation.
The problem at the moment is that the depth of the economic depression cannot yet be gauged. At present it is not possible to determine the size of the deceleration, because in some branches the situation is not at all that bad. This is indicated by surprisingly high export levels, which increased in May year to year by 16 percent. The export trade and industry evidently sits as ever on tidy order numbers, which it will process in its own timely fashion.
This explains for example why the machine and equipment branches are quite optimistic for the current year and expect a production increase of five percent. However, with world economic situation deteriorating further, as the Ifo institute indicated recently , the foreign orders are bound to start thinning out. This applies especially to USA, where Fed pointed out not so long ago the danger of a recession. Additionally Japan is on the doorstep of recession, which the experience shows, may drag the whole of Asia down.
Tax reductions gone with a wind
This much is already clear: the private consumption, on which hopes rested, will to a large extent fail as economic situation engine. 2,5 percent the increase was estimated for this year estimated, at present it amounts to less than half of this number. The reduction of taxes at beginning of the year, nevertheless about 45 billion DM, with a little less than half allotted to the private households, will not result in more demand. The reasons for that can be found in the disconcertion of the citizens, above all however in the price increases, which absorb a part of the additional purchasing power.
The main cause of concerns is the increasing inflation. The price barometer snapped up by 3.5 percent in May. The number may hide some statistical artifacts, so that the price curve may flatten out again in near future. Fact remains that the underlying data point upward. The import prices rose in April with again stronger 5,1 percent and the producer' prices have been climbing continuously, passing five percent mark. This shows that the pressure on the cost-of-living index by the pre-consumer entities is undiminished .
Thus Germany has gotten precariously close to the Stagflation, to that explosive mixture of stagnation and inflation, which makes the war on growth weakness so difficult for the monetary policy. The hesitations of the European central bank regarding further reductions of the rate of interest have something to do with it. The monetary stability however is not in danger only in the largest member country, but also elsewhere (see table), which restricts the alternatives of the bank.
Table: prices drift apart (inflation rates)
Netherland 5.4
France 2,5
GB 1,7
Italy 2,9
Ireland 4,1
Spain 4,2
Germany 3,5
This, although for example in France, where the rise in energy prices was cushioned by tax reductions, the current inflation rate is 2.5 percent. In Germany, however, additional tax burdens were added on top of the rising energy prices and it looks like this approach will be used also in the future. Before the beginning of next year the fuel prices will rise due to sulfur and ecology taxes by another 10,5 Pfennig.
What is to be done to counter the downtrend? The portfolio of possibilities is thin, especially so because it’s certain that from the monetary policy side, no working measures, if any at all, are to be expected. The state could lower the taxes, (a step, that is asked for on a regular basis) and speed up the next round of tax reductions. However this would mean trouble for the household consolidation process. Federal Minister of Finance in his 2002 budget proposal plans further cuts in investment, with the intention of sparing himself cuts in consumer positions. In a downturn like the one we are experiencing right now, however, it is unquestionably wrong policy to cut the federal investment. In Berlin people evidently bet on the upswing to appear from somewhere. Where from, however, nobody knows. |
