British and German Growth

May 25, 2010

Global financial markets have been unnerved by concern about the impact of the sovereign debt problems of several countries in Europe.  Governments failed to downsize their full-employment deficits when growth was expanding decently in the middle of the last decade, and fiscal deficits shot up as tax revenues plunged during the great recession.  Premiums that markets imposed on long-term interest rates in the problem countries are a third factor boosting deficits and debt.  The IMF/EU aid package is large enough to forestall a default this year and next, but market pressures have persisted.  Investors still suspect that impatient northern Europeans and impoverished southern Europeans will not persevere until the job is completed of restoring Southern Europe’s public finances to a sustainable foundation.   Finishing the job is a matter of will, not means.  The last few months have not inspired confidence.

European growth must be maintained for the process of deficit reduction to succeed.  The recipe calls for countries with fiscal austerity to achieve export- and investment-led growth.  The creditor nations, in contrast, need to promote healthier consumer spending.  Germany is Europe’s main creditor nation.  Britain, which is in the EU but not a participant in the common currency union, has a huge fiscal deficit and rapidly rising debt.  Germany released national income account figures last Thursday, and Britain did the same today. 

Britain emerged from recession in the final quarter of 2009, but activity so far has been very weak.  Real GDP advanced 1.2% at a seasonally adjusted annualized rate (saar) last quarter and at a 1.5% average pace over the half year between 3Q09 and 1Q10.  In this year’s first quarter, U.K. import growth of 5.7% saar swamped export growth of 0.2% and depressed the quarter’s annualized GDP growth rate by 1.6 percentage points (ppts).  Personal consumption edged up 0.1% saar.  The economy got its impetus from a rebound in business investment (+6.3% saar from 4Q09 but down 2.4% saar between 3Q09 and 1Q01), government expenditures (+1.9% saar last quarter and 3.0% annualized over the past half year) and a greatly reduced rundown of inventories, which augmented annualized GDP growth by nearly 2 ppts  last quarter and by 2.3 ppts over the past half year.

German GDP growth of 0.6% saar in 1Q was even weaker than the 0.7% pace in the final quarter of 2009.  The average growth over those two quarters of 0.7% saar was less than a third as strong as the pace over the prior two quarters between 1Q09 and 3Q09.  It takes two to tango, and the juxtaposition in Germany of 10.8% saar export growth with a drop of 3.2% saar in personal consumption last quarter is just as much an impediment to reducing European imbalances as is the reticence of Greek, Spanish, or Portuguese voters to accept many years of austerity.  In the first quarter, German construction fell 14.4% saar, but inventories were a major positive factor similar to the situation in Britain.  German government spending and private investment in machinery and equipment grew last quarter at respectively robust rates of 4.4% saar and 6.5% saar.

In year-over-year comparisons of the first quarter of 2010 with 1Q09, German GDP returned to the black, rising 1.7% in contrast to a 6.7% drop in the year to 1Q09.  Net exports accounted for practically the entire on-year growth rate, augmenting GDP by 1.6 ppts, whereas personal consumption and construction exerted respective drags of 0.7 ppts and 0.3 ppts.   British GDP was 0.2% lower than a year earlier last quarter despite a 3.1% rise in government spending.  GDP had plunged 5.6% between 1Q08 and 1Q09.  British exports rose just 2.6% from 1Q09 to 1Q10, about a third as rapidly as did German exports.  U.K. business investment fell by 5.7% over the past year.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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