Germany’s Federal Labor Agency announced a 177,000 rise in the number of registered unemployed in February, to a total of 5.2 million. The aggregate rate of unemployment rose to 12.6% in February from 12.1% only a month earlier.
Even setting aside the distorting effects of seasonal factors and the changes to statistical methods for calculating unemployment introduced in January, the figures represent the highest levels of unemployment in Germany since the 1930s. Moreover, the Federal Labor Agency warned that these record figures did not yet include the estimated 100,000 individuals who have yet to register with the agency.
The disparity between the rate of unemployment in the East (20.7%) and the West (10.4%) remains a clear reminder of the structural problem presented by the five new Laender (states) absorbed after the collapse of the German Democratic Republic.
Economic optimism had been boosted in December by strong industrial orders. The particularly strong showing of investment goods (up 16.5% year-on-year) implied a degree of confidence among domestic as well as foreign investors–and the possible end to the serious investment drought that has afflicted Germany for several years. The maintenance of high export demand also demonstrated again the low elasticity of demand for Germany’s highly valued industrial equipment.
Further optimism was generated by the completion of Chancellor
However, a series of recent forecasts and data releases has proved otherwise.
Growth forecasts for 2005 indicated a slowdown in the economy (after the modest recovery in 2004), which would keep real gross domestic product increases below the level at which unemployment might be expected to fall (2.0% to 2.5%). The federal government had forecast modest growth in 2005 of just 1.7%. However,
Currently, 35% of unemployed Germans have had no work for 12 months or more. The introduction of a flat-rate benefit for these long-term unemployed, in line with the “Hartz IV” labour market reforms, has depressed disposable household income.
The February IFO business opinion surveys showed a marked drop both in the business climate, which is down to 95.5 from 96.4 in January, and in business expectations, which is down to 96.4 from 97.5 (100.0 is the long-term average).
Many, including opposition critics of the federal government, stress the need for further supply-side reforms, including further reductions in business taxation, further reductions of labor costs, the extension of the workweek and the working lifetime, and improvements in education.
However, if Germany had major structural supply-side weaknesses, they would manifest themselves in its performance as a trading economy or in the disproportionate decline of domestic employment in the manufacturing sector. Neither of these apply:
Germany’s weaknesses may lie less on the supply side than on the demand side. The trade surplus has in fact become a fixture of the economy because of the stagnation of domestic demand factors.
Real consumer spending is equivalent to around 56% of GDP and 59% of domestic demand. It has virtually stagnated over the four years from 2001, averaging just 0.25% growth annually. It is set to grow by just 0.8% in 2005. Recent figures from the German Retail Trade Association show a real fall of 0.4% in trading volume in January after a disappointing Christmas.
The order books for consumer goods in December showed a marked fall over the three preceding months, dropping to 87.5% of levels in 2000.
Even though there was a slight improvement in company equipment purchases in 2004, overall levels of equipment investment in Germany are again around 87% of levels in 2000, while building investment is continuing to decline, reaching 85% of 2000 levels. The forecast improvement in domestic private investment in the current year will still be modest and will certainly not return investment to 2000 levels.
State consumption has virtually stagnated, growing by just 3.4% in four years. This is largely due to unsuccessful efforts to meet budgetary targets under the terms of the Stability and Growth Pact in the last two years.
The rise in Germany’s unemployment levels, affecting one-eighth of the working population overall and one-fifth in the East, has depressed demand both in terms of disposable household income and in terms of the psychological threat of economic insecurity. The publication of the federal government’s Poverty Report on March 2 confirmed rising levels of poverty and wider income disparities.
At the end of the 1980s, German GDP per head was 20% higher than the EU average. Today, only four countries out of the EU-15–Italy, Spain, Greece and Portugal–show a poorer performance than Germany. The economy’s central structural burden remains the need to allocate 4% to 4.5% of total GDP to cover the cost of German unification, notably in plugging the demand-output gap in the East.
This historically colossal burden has yet to be acknowledged fully by the European Commission, which expects Germany to continue to be the largest contributor to an expanded EU budget, and to reduce its burgeoning public-sector borrowing requirements. Unless these policy imperatives are reconciled, Europe may not be able to avoid the deflationary effect of a stagnant German economy.
Schroeder and Economics and Labor Minister
The severity of German unemployment is in large measure the result of a severe imbalance in the factors of demand, which customarily drive the economy. Over-reliance on export demand and on supply-side reforms as vehicles of recovery will not be sufficient to reverse the current stagnation of Europe’s core economy, pointing to a difficult year ahead for the Schroeder government.
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