lower impact Surviving the Great Fall

The slump in China won't slow Germany much, says Handelsblatt's author.
Not much of a dent.

The German stock markets lost €30 billion of value on Monday, the day China’s economic woes spooked the world. The DAX has lost around €300 billion since its peak last April. That’s nearly 10 percent of GDP, or to put it another way, five weeks’ worth of the country’s entire economic performance.

So does that mean Germany is headed for another deep recession, like in the fall of 2008?

Probably not. Allianz, the Munich-based financial services company, even expects growth to accelerate in the third quarter.

Indeed, the direct consequences of a lasting stock market crash would be negligible. The number of private investors in Germany is relatively low, and people who do buy stocks usually don’t invest money they need for short-term consumption.  

It is only a blow to the mood of small scale shareholders, who will probably be a little somber when they check their portfolios.

In actual fact, cheap oil prices should continue to encourage consumption. And weaker growth in China is something that seems very distant to German consumers and indeed for many companies.

A fall of 10 percent in exports to China would only mean 0.7 percent fewer German exports overall.

Even the problems of big German businesses, which manufacture and export products in China, are of limited relevance – at least in the short term.  A little less will be supplied from Germany for Volkswagens or Mercedes manufactured in China – and money transfers to German parent companies for licenses and patents might be smaller than before. But in terms of the bigger economic picture, these are not really substantial factors.  

German exports will certainly be affected by the weaker economic climate in China. After all, China is the fourth largest sales market for products made in Germany. But only about 7 percent of German exports went to China in 2014.

That means even a fall of 10 percent in exports to China would only mean 0.7 percent fewer German exports overall. Moreover, higher growth in top trading partners, France and the United States, could take up some of the slack.

So overall it is not surprising that the most important early indicator for the German economic climate has so far reacted calmly to China’s weakness. The Ifo Business Climate Index even improved slightly in August.  

The 7,000 managers who were interviewed for the index actually considered the current situation better than in the previous month – and prospects for the coming six months remained almost stable. It should be noted, however, that only about 5 percent of replies arrived in the last few days, so the most recent market turbulence had hardly any influence.

If you look back at the second quarter, Germany is doing magnificently. At 0.4 percent, the economy is growing slightly above trend, and employment of 42.8 million is at record levels. Total wages have increased by 4 percent, and they replenish tax and contribution coffers.  Despite pension gifts and plaintive cries from health insurance companies, social security funds had a total surplus of €3.7 billion in the first half year, and the state overall was €21 billion in the plus.

The only blemish was a low level of investment.

If bad news from Asia persists, it will indeed matter to the German economy. But it is no reason to panic. In view of its current favorable position, Germany is well prepared for a cooling down of the economy. Even the mild recession of 2012-13, when growth dropped two consecutive quarters, was hardly noticed by broad sections of the economy and population.

A comparison with the Asian crisis of 1997-98 shows that the German economy should only be badly affected if the current crisis threatens stability of the Western financial system. Back then, the Asian crisis only hit Europe after the Russian payment default and collapse of the LTCM hedge fund rippled through the West.

The fact that banks have become more risk-averse following the crises of recent years makes a financial disaster of such systemic dimensions less likely today.  

And you can almost rule out a complete collapse in China, considering the central government’s huge financial reserves. The interest rate cut on Tuesday showed that Beijing still has tricks up its sleeve to support its economy – and to magically restore stock market value that was wiped out in the West on Monday.


To contact the author: [email protected]