German manufacturing shrinks and its wider implications
by Jonathan Saxty
(submitted 2012-04-25)
Manufacturing in Germany has shrunk at the fastest pace since 2009. According to Alice Baghdjian for Reuters, "Markit's manufacturing Purchasing Mangers Index (PMI) fell sharply to 46.3 from March's 48.4, according to a flash estimate released on Monday, well below the 50 mark which would signal growth in activity. It marked the fastest rate of contraction since July 2009 in the sector, which has been hit by a decline in some exports as the debt crisis in the euro zone has choked demand from key trading partners."
Germany remains the strongest exporter in the West and the second biggest exporter globally, behind China. Although most of the economy is centred on services, compared to the US or the UK the German economy is still heavily reliant on manufacturing, most noticeably automobiles and electronics.
Much of the German economy relies on the mittelstand - small and medium-sized (and often family-run) companies, which make the smaller parts and components for larger machines. It is for this high quality produce which Germany has become known. Now declining Germany productivity will further harm the Eurozone which looks to Germany as its economic engine.
Germany has scored especially well from emerging markets like China. As the Chinese have got richer, more are demanding high quality Western cars, noticeably the likes of Volkswagen, BMW, Mercedes and Audi. But the Chinese economy has cooled somewhat and demand is tempering.
Moreover Germany must compete with indigeneous car makers. While virtual unknowns outside of China, the likes of BAIC, BYD, Geely and Chery are becoming increasingly popular in their home market. According to Jorn Madslien of the BBC, "BAIC will show off a possible future rival to the Audi A6, the BMW 5 series and the Mercedes E-Class."
Alice Baghdjian reported, "In February, German industrial orders rose less than expected, although strong demand from non-European countries provided some momentum, and industrial output fell more than expected due to cold weather." Indeed Germany is suffering especially from the turndown in southern Europe, a huge export market.
Only around 3% of the Chinese population own a car currently, which gives grounds for optimism. The market for cars in China could see sales of 30 million a year by 2020 - compared with 18.5 million in 2011. That said, last year's sales growth of 2.5% compared miserably with a rise of 35% during 2010. This year the market is expected to grow at 5%.
According to Madslien, "Germany's leading luxury car companies all reported sales growth in China of between 30% and 40% last year, and so far this year the luxury car market in China has enjoyed a growth rate close to 37%." Even Volkswagen admits that this will be a "very demanding year" as the Eurozone debt crisis and slowing global demand weigh in.
There is also the regulation. According to Reuters, "Beijing has removed autos from the government's list of "encouraged" industries, a step widely seen as a sign that China no longer actively promotes or encourages further direct investment in its auto sector from abroad." Indeed, "China's central government also has moved to bar certain government agencies from buying foreign cars, potentially excluding global auto makers from a market that totals between 70 billion and 80 billion yuan ($11.1 billion to $12.7 billion)."
Volkswagen has admitted that China's slowing automobile industry is facing rising inventory levels. VW "boosted deliveries in the country 16 percent to more than 633,000 vehicles in the first quarter of the year, compared with a decline in total industry deliveries."
Germany's wider problems include its declining demographics, which - on current trends - will see a 7 million shortfall in the labour force, in the coming years. There is little political appetite to turn to non-European immigration to fix this. Fears of cultural dilution are increasing in Europe, as seen by the National Front's winning of 20% of the votes in the French presidential election.
Turning to European migration sources is complicated because a) many European countries have low fertility themselves, b) many of the brightest Europeans, such as in Italy and Spain, are emigrating outside of Europe and c) Germany relies on southern Europe as a major export market, which will be undermined if Germany poaches too many workers and thereby hurts the economies of these export markets. Then Germany may end up having to bankroll not only its elderly population but its ailing Eurozone partners, as it is now.
Germany's most pressing problem is its demographics. As Kathleen Brooks in Reuters said, "the cost to bailout the [European] union from an entitlements crisis would be on a far larger scale and could bankrupt the entire currency bloc." While Germany remains in a healthy financial position now, it must eventually "draw down on its fiscal surpluses in future to pay for its aging population."
As Brooks asks, "who is going to want to lend to a country that has to spend its revenue on health care and pensions rather than infrastructure and investment?" Europeans should now be realising that big government supranationalism does not work. Anything other than light-touch government will ferment the kind of country-centric nationalism which undermines a body like the EU.
Germany remains the strongest exporter in the West and the second biggest exporter globally, behind China. Although most of the economy is centred on services, compared to the US or the UK the German economy is still heavily reliant on manufacturing, most noticeably automobiles and electronics.
Much of the German economy relies on the mittelstand - small and medium-sized (and often family-run) companies, which make the smaller parts and components for larger machines. It is for this high quality produce which Germany has become known. Now declining Germany productivity will further harm the Eurozone which looks to Germany as its economic engine.
Germany has scored especially well from emerging markets like China. As the Chinese have got richer, more are demanding high quality Western cars, noticeably the likes of Volkswagen, BMW, Mercedes and Audi. But the Chinese economy has cooled somewhat and demand is tempering.
Moreover Germany must compete with indigeneous car makers. While virtual unknowns outside of China, the likes of BAIC, BYD, Geely and Chery are becoming increasingly popular in their home market. According to Jorn Madslien of the BBC, "BAIC will show off a possible future rival to the Audi A6, the BMW 5 series and the Mercedes E-Class."
Alice Baghdjian reported, "In February, German industrial orders rose less than expected, although strong demand from non-European countries provided some momentum, and industrial output fell more than expected due to cold weather." Indeed Germany is suffering especially from the turndown in southern Europe, a huge export market.
Only around 3% of the Chinese population own a car currently, which gives grounds for optimism. The market for cars in China could see sales of 30 million a year by 2020 - compared with 18.5 million in 2011. That said, last year's sales growth of 2.5% compared miserably with a rise of 35% during 2010. This year the market is expected to grow at 5%.
According to Madslien, "Germany's leading luxury car companies all reported sales growth in China of between 30% and 40% last year, and so far this year the luxury car market in China has enjoyed a growth rate close to 37%." Even Volkswagen admits that this will be a "very demanding year" as the Eurozone debt crisis and slowing global demand weigh in.
There is also the regulation. According to Reuters, "Beijing has removed autos from the government's list of "encouraged" industries, a step widely seen as a sign that China no longer actively promotes or encourages further direct investment in its auto sector from abroad." Indeed, "China's central government also has moved to bar certain government agencies from buying foreign cars, potentially excluding global auto makers from a market that totals between 70 billion and 80 billion yuan ($11.1 billion to $12.7 billion)."
Volkswagen has admitted that China's slowing automobile industry is facing rising inventory levels. VW "boosted deliveries in the country 16 percent to more than 633,000 vehicles in the first quarter of the year, compared with a decline in total industry deliveries."
Germany's wider problems include its declining demographics, which - on current trends - will see a 7 million shortfall in the labour force, in the coming years. There is little political appetite to turn to non-European immigration to fix this. Fears of cultural dilution are increasing in Europe, as seen by the National Front's winning of 20% of the votes in the French presidential election.
Turning to European migration sources is complicated because a) many European countries have low fertility themselves, b) many of the brightest Europeans, such as in Italy and Spain, are emigrating outside of Europe and c) Germany relies on southern Europe as a major export market, which will be undermined if Germany poaches too many workers and thereby hurts the economies of these export markets. Then Germany may end up having to bankroll not only its elderly population but its ailing Eurozone partners, as it is now.
Germany's most pressing problem is its demographics. As Kathleen Brooks in Reuters said, "the cost to bailout the [European] union from an entitlements crisis would be on a far larger scale and could bankrupt the entire currency bloc." While Germany remains in a healthy financial position now, it must eventually "draw down on its fiscal surpluses in future to pay for its aging population."
As Brooks asks, "who is going to want to lend to a country that has to spend its revenue on health care and pensions rather than infrastructure and investment?" Europeans should now be realising that big government supranationalism does not work. Anything other than light-touch government will ferment the kind of country-centric nationalism which undermines a body like the EU.
About the Author
Jonathan is a barrister and holds a degree in criminology from the University of Cambridge. He writes for Virtue Politics
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