Dean Baker writes a stimulating blog that I recommend consuming regularly. Even seemingly innocuous posts can sometimes lead one to unexpected places.
The starting point is Dean gently chiding the New York Times for calling Germany a ‘graveyard for retailers’ because its growth was based on exports and domestic demand was weak. Dean points out that even if the level of consumption in Germany is lower than the US (as a % of GDP), German retailers will tend to stay stay in business – at least to the same degree as in America – unless that figure goes down. The upshot is:
Retailers fail in Germany for the same reason that K-Mart and Borders failed in the U.S.; they do a poor job of serving their customers.
This is all very true. Still, I was convinced that the NYT had a point: only yesterday I pointed to the downward pressure on German wages in the 2000s as a reason for Germany’s current account surplus, and surely depressed private consumption and retail sales growth were part of that story.
So what do the numbers say? The first graph shows the contributions to GDP of private consumption, government consumption, investment and net exports for Germany (solid lines) and the US (dashed lines) since 1995, in % of GDP; the numbers add up to roughly 100%, any differences being the changes in inventories whose contributions are very small. The second graph shows the differences in those GDP contributions between the two countries, in pp. of GDP. (Data source is AMECO.)
Dean is right about the stability of private consumption in Germany: it was around 57% back in the late 1990s, and that’s where it is today. There was, though, quite a sharp drop during the crisis, which – alongside the chain doing a poor job of serving their customers – is what did for Karstadt, an example given in the NYT article.
But look at US private consumption: it hiked around 2000 and rose further during the crisis. Overall the increase has been around 4 pp. of GDP. Consequently the gap between Germany and the US has widened quite substantially, from around 10 to almost 15 pp. of GDP:
So Dean is not quite right that “the gap [between the countries] is not new”. The comparison of consumption shares does suggest that retailers have had it easier in the US than in Germany. (Not to mention, of course, the faster GDP growth rate on the other side of the pond, until recently.)
At the same time, my prior, namely that German private consumption had been severely squeezed in the years before the crisis, is not really born out by these data either.
What could be the story? Let us turn to the other aggregates. Well, the net export trend is well known and needs little comment: rising surpluses and deficits in Germany and the US respectively since 2000, narrowing somewhat since the crisis. To point to this was fair comment on the part of the NYT. What I found more interesting were the trends in government consumption and investment.
In the 1990s government consumption was about 5 pp. higher in Germany and the US. No surprise. But the gap was steadily reduced after the start of monetary union, to reach less than 1.5% in 2008. There was some increase in the US, but it seems that to a significant extent the squeeze on domestic demand in Germany was in the public, rather than the private sector (especially given that the latter is only around one third the size of the former).
Investment is also – at first blush – counterintuitive: those spendthrift Americans actually had a higher investment share than the industrious and competitiveness-obsessed Germans during the mid five years of the last decade. The explanation for this finding is simple – in a word: housing. (Construction is part of investment in the national accounts.)
Of course private consumption is a large chunk of GDP (even in Germany). So a private-consumption-squeeze story can still be told to the extent that it led to slower overall GDP growth. Still, if private consumption had been the main driver, then its share would also have been expected to fall.
One last point: the AMECO data (not shown in the graphs) reveal surprisingly (at least to me) little difference in these GDP compositions between Germany and Europe, with one exception. Over the entire period the private consumption share in the EU27 was within one percentage point of that of Germany. This was initially also the case with government consumption, but this fell, as we have seen, in Germany, while rising in the rest of the EU: but even at the end of the period the gap was only about two pp. In the case of investment Germany was slightly higher than Europe in the 1990s, lower during the pre-crisis 2000s and there has been parity since. (Here, too, distinguishing investment in equipment from construction would show substantially larger differences.) Net exports are the big exception: Germany’s rise contrasts sharply with the almost flat development in Europe as a whole.
So once again public, rather than private consumption patterns (alongside net exports) do seem to be important for German ‘exceptionalism’ within Europe.
An interesting journey, I hope you agree. What are the conclusions? You learn a lot from reading stimulating blogs critically; always look at the numbers; and be prepared to revise your view of the world in the light of the evidence.
I have kept my prior that Americans have a consuming, and increasing, passion for consumption and Germans for current account surpluses. But in Germany, at least, the private-sector-demand-squeeze story is clearly too simple.