Friday, November 13, 2009

Therapy against superstition

Friday 13th can also be a lucky day. According to the first estimate by the German agency for statistics, GDP increased by 0.7% QoQ, after an upward revision of Q2 to 0.4% QoQ. Compared with the third quarter of 2008, German GDP is still down by -4.8%%. The decomposition of the GDP numbers will only be published on 24 November but recent monthly data indicate that industrial production and a turning inventory cycle were the main drivers of growth. Private consumption may have actually declined during the third quarter.

The German economy has emerged from the deep recession earlier and faster than many had thought. The latest monthly numbers show that industrial production has taken over the baton from car-driven private consumption as the main growth driver. Looking ahead, the current momentum is likely stay for some time. The inventory cycle has just started to turn and positive news will continue. Moreover, filling order books and accelerating global demand point to a further pick-up in economic activity.

Despite all delight about the ongoing recovery, the biggest risk for the German economy and policymakers would be to simply return to business as usual. The damage and the marks the recession has left in the economy are still significant. The German economy has already returned to its trend growth. However, even at the pace of the last two quarters, it would take until 2012 before the German economy has returned to its pre-crisis level. Therefore, the cleaning-up efforts will need to continue. The export-driven recovery is all well and good but in order to shift into a higher gear, the German economy needs domestic demand. In this respect, tax cuts and investment incentives may not be the only, but certainly a good way forward. The bad times are over but the good times have not started, yet. Even with today’s good numbers, complacency would be a bad advisor.

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