With but a few weeks left in “Recovery Summer,” this past week was not what many would have hoped. On Tuesday, the Federal Reserve’s FOMC announced that “the pace of recovery in output and employment has slowed in recent months” and “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” Conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The market responded to the Fed’s optimistic forecast much as one might have predicted.
The front page article in today’s NYT by Graham Bowley and Christine Hauser provides a sobering description of where we are economically:
The optimism that had pervaded Wall Street only weeks ago has faded quickly. In its place is a growing realization of what many Americans have been feeling in their bones: this is not the economic recovery the nation had hoped for. While the economy is growing again, it is growing too slowly to create many jobs or to increase household incomes. Given the uneven rebound in the United States, and now signs that the world’s other economic engines are slowing, economists say Americans may confront high unemployment and lackluster growth for some time to come.
The Goldman Sachs Group added to the sense of malaise when it informed its clients that there is a 25 to 30 percent chance that the U.S. economy will fall back into recession. (Bloomberg).
While things are increasingly dismal in the US, there are rays of hope across the Atlantic…more precisely, in Germany.
As Roddy Thompson reports: “Germany posted Friday its best quarterly growth since reunification.” The growth rate between April and June was 2.2 percent, compared with 0.6 percent in the US. In the words of senior ING economist Carsten Brzeski, Germany is “playing in a league of its own.” By any one’s account, an annualized rate of growth approaching 9 percent is quite impressive. Kay Murchie notes at the Financial Markets blog that the growth in Germany has been largely export driven: “Earlier this week, Germany’s federal statistics office reported exports grew 3.8% in June compared with May. On an annual basis, exports were 29% higher.”
According to the Economist blog, Free Exchange, the surge in exports is only part of the story. Growth must also be attributed “to investment by firms at home looking to upgrade and expand their capital stock to meet that demand.” German firms are not worried by
American complaints that Germany is living off the spending of others and adding little to global demand have much impact. There are some signs that Germany’s recovery is leading to more spending at home. The German statistical office said that consumer spending made a positive contribution to GDP. Some firms are already reporting skill shortages, which ought to be good for jobs, wages and (eventually) consumption. Even so, a more balanced recovery in Germany may yet be thwarted by fragile banks and by the inherent thrift of consumers.
Germany’s impressive growth must come as a surprise to the Obama administration. If you will recall, in the early days of “recovery summer,” the administration chastised the Germans at the G-20 for providing insufficient stimulus to domestic demand and relying too heavily on exports. Chancellor Angela Merkel rejected the administration’s advice. As Marcus Walker and Matthew Karnitschnig (WSJ) reported at the time, Merkel claimed that the core argument “that increased deficit spending promotes growth— doesn’t apply in Germany.”
Continuing to run big deficits could backfire here, she said, because of Germans’ angst over their aging society and rising public debt. Fear that the German welfare state could run out of money leads individuals to save their income as a precaution, she said. If Germany cuts its budget deficit instead, “then the citizen is more willing to spend money,” she said, “because he knows that he can count on the pension, health and elderly-care systems.”
So, lets sort this out: if the government reduces the budget deficit, citizens have greater faith in the future and, as a result, are more willing to spend? Fiscal stability creates a comparable faith for corporations, leading them to invest in their capital stock? And all of this promotes growth?