ANALYSIS-German rebound may help euro zone peers after all

Trade the News

Friday September 03, 2010 07:42:12 PM GMT

* Private consumption contributing more to growth

* German imports from France, Italy soar

* Wage rises would make others more competitive

By Annika Breidthardt

BERLIN, Sept 3 (Reuters) - The grounds for criticising Germany for growing at the expense of others are fading, though it is still unclear whether its recovery will drag the rest of the euro zone with it.

A slew of data last month on imports, consumption and workers' ambitions on wages suggest Germany's consumers may finally be coming out of their shell -- making its surprisingly strong growth a boon rather than a threat for others who have had more trouble emerging from this year's debt crisis.

Europe's biggest economy certainly has its exports to thank for pulling it out of its deepest post-war recession last year.

Its big current account surplus, its citizens' bias for saving rather than spending and the government's 80-billion euros savings spree give ample grounds for criticism that the German boom is making life tough for weaker European countries.

But second-quarter figures on gross domestic product showed private consumption turned up and actively contributed to the the 2.2-percent rise in national output -- the fastest since reunification two decades ago.

Imports from other European countries are also soaring compared to a grim 2009 and many economists expect households and businesses will only spend more as the economy recovers further. The GfK market research group says consumer morale is likely to rise in September to its highest level since October 2009, helped also by falling unemployment.

"We expect low unemployment despite the crisis and thanks to labour market liberalisation will have a positive effect on private consumption. That will broaden the pickup," said Ilja Nothnagel of the DIHK Chambers of Industry and Commerce.

"That means we are not growing at the expense of others but in fact the other countries are buying German capital goods, with which in turn they can generate growth."

POWERHOUSE

Imports to Germany rose to 71.2 billion euros in June, almost a third more than in the same month a year ago and also up 1.9 percent on the month, raising hopes German demand will pull the rest of Europe along with it.

In June, Germany imported a total of 5.81 billion euros from France, almost 40 percent more than at the end of last year and nearly 20 percent more than in the same month a year ago.

In the same month, Italy -- one of the so-called peripheral PIIGS European states -- increased its exports to Germany by 14 percent on the year, and more than a fifth since the end of 2009. June is the last month for which data are available.

"We are the economic powerhouse of Europe," Finance Minister Wolfgang Schaeuble said on Wednesday.

"And what's important internationally, we have the highest import figures in the history of the Federal Republic. That means we are taking our role in a globalised world seriously."

State-owned development bank KfW said on Friday the German economy could grow by 3.6 percent in 2010, and in the past such growth has tended to pull the rest of Europe with it.

But while Europe remains Germany's largest trading partner, its share of German imports has declined steadily over past decades as the country turns increasingly to North America and Asia, especially China.

This year's pickup has only just brought Italian and French imports to Germany back to levels from the start of 2008, before the financial crisis. And while consumers may be becoming more optimistic, there is also the prospect of eye-watering cuts in budget spending -- and public sector demand -- to come.

HIGHER PAY TO HELP

The other issue is competitiveness, with critics arguing that Germany locked in an advantage over many of its poorer peers when they adopted the euro and has kept a tighter lid on wages than others since.

Countries like Spain or Portugal as a result will have to cut wages to compete with cheaper alternatives in eastern Europe, China and the developing world, but there are also some signs that Germany's own edge may fade.

The country's largest trade union last week demanded a 6-percent pay hike for some 85,000 steelworkers and has called for engineering employers to bring forward a pay rise agreed for next May by two months. [ID:nLDE6810M0] That may set benchmarks for other industries,

French Economy Minister Christine Lagarde, who earlier this year criticised Germany for not doing enough to increase domestic consumption, said this week a boost in German wages would profit the euro zone.

"I had always said that the recovery of the German economy ... would only be a good thing for the euro zone if workers benefit from it through salary increases and if there is consumption," Lagarde said in an interview. [ID:nLDE67T1T2] (Additional reporting by Paul Carrel; editing by Patrick Graham)

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