January 13, 2011

German Economy Grows By 3.6%

Strong domestic demand, rebound in exports cited as cause

The German economy grew last year by 3.6%, its fastest pace since reunification. According to preliminary data, a rebound in exports and strengthening domestic demand were the cause.

This strong rate of growth comes on the heels of a sharp contraction experienced in 2009, when economic output fell by 4.7%, its worst showing since World War II.

Germany's recovery is a bright spot in an otherwise struggling Euro zone, with Portugal and Greece the subject of daily consternation.

“Germany posted strong growth for 2010, but that was only after a strong decline in 2009,” says Jacob Funk Kirkegaard, (left), a research fellow for Peter G. Peterson Institute for International Economics, a Washington, D.C.-based think tank. “It won’t post that type of growth in 2011, more in the area of 2.5%.”

Kirkegaard notes that Germany’s economy is cyclical and trade dependent. The decline in GDP they experienced in 2009 was almost twice that of the United States, and this latest boom might in fact be a reversion to the mean.

He adds that being so export dependent, and with the growth in emerging markets with which Germany trades, the news is not all that surprising.

“The labor market reforms they instituted under [Chancellor Angela Merkel's predecessor] Gerhard Schroeder really came to fruition in 2010,” he says. “They promoted part-time work and other initiatives, so they were well-positioned for when the recovery began.”

These labor initiatives led to an increase in wages and a corresponding increase in German demand, which Kirkegaard says is good for the EU as a whole. France, Italy and to a lesser extent Spain are all valuable trading partners with Germany. This increasing demand will benefit those countries, specifically.

Greece and Portugal won’t be affected because they don’t export much,” he says. “But for the larger economy, this increase in German demand will be an important factor in the rebalancing of the EU.”

According to preliminary statistics from the government, investment in machinery and equipment was up 9.4%, following a decline of 22.6% in 2009. Household spendingrose 0.5%, recovering from 2009's 0.2% decline.

Imports rose 13% from a 9.4% drop the previous year.

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