Germany Could Face Trouble in 2012

Sources:
FT: German Economic Recovery Stalls
Spiegel: Germany Could Face Recession in 2012
WSJ: German Economy Heads Downward

On Wednesday, the German Federal Statistical Office reported that despite the country’s strong economic growth during much of 2011, Germany’s gross domestic product (GDP) contracted by 0.25 percent in the final quarter of the year. This contraction increases the chances of Germany falling into a recession—defined as two consecutive quarters of negative economic growth measured by a country’s GDP—which would make it more difficult for Eurozone leaders to contain the region’s debt crisis.

Even as the Eurozone debt crisis has escalated, Europe’s largest economy saw only a modest economic slowdown last year after 3.7 percent growth in 2010. In 2011, the German economy grew three percent and the national deficit decreased to about one percent of GDP from 3.3 percent in 2010. This growth was partly due to an increase in consumer spending, which was up by 1.6 percent from 2010 and the highest seen in the last five years.

Despite last year’s growth, many economists expect Germany’s economy to grow very little or not at all this year mainly due to the continuing Eurozone debt crisis. The Bundesbank (Germany’s central bank) is forecasting that growth will slow to 0.6 percent in the first half of 2012 before starting to recover in the second half of 2012 and reaching 1.8 percent by 2013. The slowdown in global growth and trade along with increasing doubts about the austerity measures in many Eurozone countries are the main reasons behind the possible contraction. Lower global trade negatively affects German exporters, while the Eurozone debt crisis has caused German businesses to put investment plans on hold due to economic uncertainty. Similarly, doubts about the austerity measures in other countries can affect Germany significantly. Foreign austerity measures tend to decrease the disposable income of individuals in those countries as taxes increase and wages fall. As a result of the lower income, citizens stop buying many goods and consumption declines. A downturn in the debt crisis is likely to lead to serious problems for Germany’s economy, as about 40 percent of its exports go to other European Union countries.

A recession in Germany would have negative consequences for all of Europe. In the face of a recession at home, German lawmakers and voters may refuse to support additional funding for bailouts for struggling Eurozone countries. Without a contribution from Germany, those bailout funds may disappear entirely, the consequences of which could be disastrous.