Germany Economy, What Price the VAT Effect Now!

I don't think there is much to say about the chart below. I created it as I was going through the detailed data for Q3 2007 German GDP. Some of the things you were taught in Econ 101 do turn out to be more or less valid, despite what a whole battery of people who should have known better (from the FT to the Economist) were telling you not so long ago. You can't raise prices without some effect on demand. And when you tell people you are going to raise them in advance, then you should expect them to stock up as best they can. So we get a big spike at the end of 2006, and then 3 quarters of year on year negative consumption growth. I'm not sure after this experience people will be piling ageing society costs onto already fragile domestic consumption again. I do hope they are looking at this data in Japan.




Inflation on the Rise

And just to make things really complicated for the ECB German inflation accelerated in November to the fastest pace in 12 years, led by surging oil and food costs.



onsumer prices, measured using a harmonized European Union method, rose 3.3 percent from a year ago after increasing 2.7 percent in October, the Federal Statistics Office in Wiesbaden said today, confirming a preliminary estimate published Nov. 27. That's the fastest inflation measured since harmonized data for Germany started being collated in January 1996. In the month, prices rose 0.5 percent.

An 84 percent surge in oil prices since mid-January is driving up inflation even as the euro's ascent to a record against the dollar makes imports cheaper. While the European Central Bank on Dec. 6 left its key rate at 4 percent, President Jean-Claude Trichet threatened to raise borrowing costs if workers win bigger pay increases to compensate for higher costs. While the wage response to the price pressure is likely to be moderate, the inflation squeeze following on the back of the VAT hike is likely to weaken an already weak domestic consumption even further.




As we can see in the chart below - which gives a breakdown in Q3 GDP component contributions to growth, the heavy lifting was carried out by exports, and these were followed by machinery and equipment investment (which to some extent is related to export needs). So if external conditions deteriorate, even slightly - which all the forecasts suggest they will for 2008 - then Germany will have increasing difficulty maintaining the pace of the export expansion. Remember, for Germany to fall into recession we don't need to see negative export growth, just a substantial reduction in the rate of increase.




and just to end up where we started, here is a chart of the contributions of private domestic consumption to GDP growth in recent quarters. As can be seen, during the three last quarters (following the VAT anticipation spurt) consumption has acted as a drag on growth. With inflation now biting into consumers pockets, and monetary conditions effectively tightening, this position is more than likely going to deteriorate.