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Will slow growth in Germany weigh down the Eurozone?

Marketplace Staff Aug 16, 2011

Will slow growth in Germany weigh down the Eurozone?

Marketplace Staff Aug 16, 2011

JEREMY HOBSON: Another major economy is reporting slow growth for the last quarter. Germany says its economy only grew 0.1 percent. That’s far less than the half percent growth that economists were expecting. Now, why does that matter to us? Well, as the last couple weeks have shown us, Europe’s debt problems can have a big effect on our economy — and Germany is seen as relief ship for Europe.

For more, let’s bring in Bob McKee. He’s Chief Economist of the investment consulting firm Independent Strategy. And he’s with us now from London. Good morning.

BOB MCKEE: Good morning.

HOBSON: Well, first, what is your reaction to this German GDP number — how bad is it that Europe’s powerhouse economy is putting up a growth number like this?

MCKEE: Well, Jeremy, I think it is concerning because as you say, Germany has been the driver of European growth over the last couple of years, driven by exports, growth and a very good performance there in investments. And these figures show just a 0.1 percent increase over the last quarter. A very tiny increase, so that’s a bad sign, especially as we just had figures from France which show exactly the same situation — no growth at all there in the last quarter.

HOBSON: Is Germany’s problem — the rest of the world simply isn’t buying as much German stuff as it used to?

MCKEE: I think that’s it, Jeremy. It has excellent products — it’s the second largest exporter in the world, so it’s been a powerful force for global growth and particularly for the rest of Europe. And because of the general slowdown in demand, then it’s selling a little less, and we’re seeing a slowdown on its growth. The question is if that will continue off of this year and into next year.

HOBSON: Now, Germany has been the lynchpin for the European debt crisis. They have been the bailer-outer if you will, what does this mean for other European countries that struggling with a lot of debt?

MCKEE: Germany has been the leading growth support and also the paymaster. If it’s growing less, it will be more reluctant to bail out other countries. This is a worrying situation. Hopefully this is a temporary one — I think it is. And we’re not entering, yet, an outright recession in Europe. But, it certainly doesn’t help in a moment of crisis for the Eurozone.

HOBSON: Well, that’s a hopeful view, that we’ll get out of this soon, because I have to say, when you look at Germany with one-tenth of 1 percent growth, France at 0 percent, Japan actually shrank last quarter, and the U.S. is at 1.3 percent, it sure looks like we’re heading in the wrong direction.

MCKEE: Basically, in the first half of 2011, the major economies of the world have slowed to a stopping position. The question is whether that will continue as it’s just a patch, a temporary pause. I think that will depend on whether investment continues to pick up, and eventually the consumer around the world will continue to spend. Consumers are not spending because they’ve had a huge amount of debt that they built up over previous years, and also governments have a lot of debt after bailing out the banks during the financial crisis. And they need to pay that down. So when everybody wants to pay down debt, they don’t want to spend, and that keeps demand weak, and that’s the problem for the world economy over the next few quarters.

HOBSON: You don’t see us heading into another global recession here?

MCKEE: Well, it’s a close call, but if you want me to write on the line which way I’m going to go, I think you’ll see lower trend growth, probably in the major economies of 2 percent or less. That’s very poor. It means that unemployment won’t come down, jobs will not be created. But it’s not quite in the reign of total output and therefore a new recession.

HOBSON: Bob McKee, chief economist with Independent Strategy, an investment firm in London. Thank you so much for joining us.

MCKEE: Thank you, Jeremy.

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