http://www.google.com/hostednews/afp/article/ALeqM5hpC20s4vZTTZQwJRzslwIdKy6Uug
Whats the economic condition of Germany these days, why does it seem more stable than other nations in the EU? It says the economy is on the rebound, but is that true, and why? It seems to suggest it is because of subsidizing shorter working hours… but how in the world does that make sense? I’m just not quite sure how to make sense of this sort of news, and I don’t quite know where to look for answers.
I am hundred percent sure that subsidizing scheme didn’t help the recovery and employment. I do not know the exact details of the program, but the article is indicating that the German government encouraged shorter working hours. This is equivalent to work sharing scheme aimed at cutting the unemployment rate. Basically, each worker is allowed only to work certain amount of hours during the week. In order to keep the production at the desired level a company has to hire more workers, which results in a lower unemployment rate.
For example, let’s say we have a company that has 10 workers. Before the recession, each worker worked 40 hours per week, so the total labor hours in the company are 400 hours. With these 400 hours of work, a company can produce a desired amount of goods. Let’s say when the recession starts, the company has to cut its production, and it decides it only needs 200 total labor hours to maintain the desired production. Consequently, it cuts the labor force by half, which boosts the unemployment rate in the economy. Then, let’s say the government makes a rule that each worker can only work 10 hours per week. This means that the total labor hours are 100 hours now. But the company cannot maintain the desired level of production with only 100 hours worked, so it has to hire back 5 workers it fired. This cuts the unemployment rate, but the total labor hours are still only 200 hours. The only thing that has changed is that the misery is share by all the workers equally. So in this case the more accurate measure of the employment picture is total labor hours. Actually, working scheme is bad for recovery since it prevents quick reallocation of labor.
I unfortunately don’t know the details of the German recovery. But then again economic laws dictate that market forces are responsible for the recovery—letting the prices adjust and letting labor and capital move where the consumer demand pushes it. The more the govt interferes with this process, the less robust and slower your recovery will be. Also, Germany didn’t have as big of a credit bubble as the US and some other parts of the world. Germans are generally known as savers, which allows for a faster rebound in capital accumulation and investment. Their economy is very competitive, so they are able to take the advantage of surging demand in Asia much faster than other economies.
The “short-time work” thing went like that: companies without sufficient orders to use all their capacities would send workers home for whatever amount of time necessary to distribute the amount of available work equally among the amount of available workers. The hourly wages that workers consequently missed were (partially) reimbursed by the government. It’s like being on unemployment without being fully unemployed.
I wrote on my blog about this topic. If I may
[quote]
(http://tanhill-capital.com/wordpress/?p=36):
I don’t doubt this recovery. It appears to be solid.
This, however, does not mean I’m bullish. Far from it. The Economist mentions the following:
Germany’s talent for bespoke engineering and sleek cars fits well with the needs of fast-industrialising countries and their new middle classes. China is a prized customer for the German firms that supply kit for power plants and other infrastructure projects. Small producers of niche capital goods have also seen a surge in orders. German cars have been selling well to affluent consumers in emerging markets. Sales of luxury Mercedes cars to China tripled in the year to July. Sales to India more than doubled. Other carmakers, such as VW and BMW, have prospered too.
The recovery is not driven by domestic demand. Chinese buyers are saving German jobs. That’s fine for now, but I’m concerned about the longevity of this Chinese spending spree. China is currently in the last phase of at least one major investment bubble: housing. American consumers loved to buy German luxury chars with their home equity when it was still increasing on a monthly basis. Where are they now? Or, as China bear Jim Chanos put it in BusinessWeek:
The perception seems to be that China will grow out of this situation. But the problem with that argument is the real estate being built is not for the masses. This is not affordable housing for the middle class. This is high-end condos in major urban areas and high-end office buildings. Just to give you an idea, right now construction costs in China are starting to hit $100 to $150 per square foot in some cities. That doesn’t sound like a lot by Western standards, but it means a condominium basically presented to you with no floors, no walls, no appliances costs the average Chinese two-income couple $100,000 to $150,000 U.S. That Chinese two-income couple in their 30s probably makes combined $7,000 or $8,000 a year. You do the math. Even if they were making $10,000 to $15,000 a year, they couldn’t carry a $150,000 condo. This is very similar to someone making $40,000 in the U.S. at the height of our bubble buying a $600,000 or $800,000 house. We know how that ended.
If I was in for a short-term gain, I’d be looking at German stocks right now. But I wouldn’t expect this to become a long-term, not even a mid-term haven for my money. The strength of the German recovery is dependent on the purchasing power of foreign consumers. International demand has been plummeting as a result of the financial crisis. China is currently filling the gap. If Chanos turns out to be right, who is going to step in for China?
Germany was one of the countries less hit by the construction frenzy which swept the PIIGS and is also notable for having slightly lower taxes than most of the EU and lower levels of government intervention. Also (and I hope out German friends will help me out here since my memory is leaking worse than Gulf of Mexico oil rig) I seem to recall that Germany recently hiked taxes on individuals (fuel excise etc) to give industry more tax breaks and subsidies. Volkswagen has become the fifth European car brand in terms of direct State subsidies (the first four brands are, of course, Italian and French).
Direct taxes have remained stable for the last 2-3 years if I remember correctly. A lot of subsidies disguised as “stimulus measures” were passed, though. Germany invented the Cash for Clunkers program. The road tax system was changed to make people buy new “eco-friendly” cars. And so on.
Sphiron,
How big is the bubble in China? Do you have more data on it? Like:
Price appreciaiton
Lending standards
Inventory turnover
Number of people owning houses; Number of people owning two or more
I doubt that the bubble is going to be as devastating as in the US since Chinese have legitimate savings. I haven’t heard about Chinese using home equity loans to finance their consumption. Do you know if they even have home equity loans? How much would a burst affect the Chinese consumption? I do think that in the long run purchasing power is going to transfer to China, so making a long term play on Chinese consumption is a good move.