The German economy has begun to slow down, as has the overall global growth backdrop. Last year, Germany’s GDP grew by 1.4% as compared to the prior year after two relatively strong growth years in 2016-2017 of 2 – 2.25%. The chart below shows the year-over-year % change in quarterly GDP adjusted for inflation (i.e., based on 2010 Euros) since Q1 2008. The economic recovery following the global financial crisis in 2008-2009 was robust, with growth accelerating to nearly 5% in Q2 2010. Following weakness as the Greek debt crisis played out, the economy has since maintained growth in the 2% range. Most recently, however, growth has slowed to the Q1 2019 pace of just 0.6%. Next Wednesday, August 14th, the government will release its estimates for Q2 2019 GDP growth and the consensus forecast is for a slight 0.1% gain as compared to Q2 2018.
Unlike many other economies, however, the German federal government has significant flexibility to stimulate the economy should economic growth falter. For example, the government is running a fiscal surplus, taking in more tax revenue compared to its government spending on goods and services. The chart below shows Germany’s federal government budget balance since 2008, with a surplus for the four years since 2015.
Further, the government debt outstanding has been declining. As compared to the U.S. debt position, it is tame. The chart below shows the U.S. and Germany government debt as a % of GDP. The U.S. debt ratio has climbed to over 100% while Germany’s debt-to-GDP ratio fell to 32% last year.
There are two other important features of the German economy: The value of the Euro has weakened, making Germany’s exports cheaper for companies who purchase their goods outside of the Euro Area. Moreover the current account has been in surplus for many years, and it currently nearly 8% of GDP (chart below). This means that Germany is a net lender to the rest of the world.
This favorable position is due, in part, to its trade surplus. As of 2018, Germany’s trade in goods stood at a surplus (more exports than imports) by 230 billion euros. The trade surplus has steadily grown since the end of the global financial crisis in 2009. One important component of this trade surplus is the significant exports of motor vehicles and parts (MVP), rising to nearly 20 billion euros in early 2019, and well above MVP imports of under 12 billion euros. The chart below shows monthly MVP exports and imports since 2008.
These economic and financial conditions are further reinforced by the European Central Bank’s (ECB) “easy” monetary policy, and a German bond market (or bunds in the German language). At present, the ECB is maintaining a 0% refinancing rate, the key policy rate they use to implement their monetary policy stance.
This stimulative monetary policy is coupled with a now negative 10-year German government bund yield. At the end of July 2019, this bund yield was trading at -0.44% (see below). And at market close on August 9th, it fell further to -0.58% (not shown in chart)! What does this mean? It means that the purchaser (investor) of this bund is willing to pay the German government for the “honor” of buying this bund. Usually it is the case that a purchaser of a bond would receive interest payments for providing the coupon payment to the borrower, in this case the German government. After all, you, the purchaser (investor) are paying for the security. The money flows to the government from the purchaser of the bond. And now, with negative interest rates, the purchaser doesn’t receive interest for loaning this amount, but also pays the borrower interest.
This summary of economic and financial conditions in Germany brings us to this week’s news that the German government might choose to stimulate the economy by spending money on “climate protection.” Reuters reports that the government may put forth a plan to expand “e-mobility infrastructure” and offer a “cash for clunkers” program. Popular opinion in Germany (and in the U.S.) is supportive of government efforts to address climate change. The difference is that Germany has the immediate flexibility to implement it because of their fiscal position and current monetary policy which has contributed to very low — indeed negative — borrowing rates. Germany’s ability to implement a “cash for clunkers” program means that it can provide an incentive to buyers of electric vehicles if they will trade in their older, diesel or gasoline engine vehicle to be scrapped. In this way, the government can provide stimulus to transition the vehicles on the road to clean energy technology and to meet their emissions reductions targets.