Essay: MACROECONOMICS PROJECT

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  • MACROECONOMICS PROJECT
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GERMANY

SECTION 1

In the Euro Area Germany is the largest economy and fourth largest in the world. Germany is among the leading exporting countries in the world, currently being third in the overall world ranking and its exports make up more than one-third of its national output. The major exports of Germany include vehicles, machineries, chemical goods, electronic products, electrical equipment, pharmaceuticals, transport equipment, basic metals, food products, and rubber and plastics. In Germany timber, iron ore, potash, salt, uranium, copper, and natural gas are available in vast supplies. Fossil fuels consist of 50% of energy sources for Germany, followed by nuclear power second, then gas, wind, biomass (wood and biofuels)

Rank Country Exports (Billions $)

1 China 2,210

2 United states 1,575

3 Germany 1,493

4 United kingdom 8,13.2

5 Japan 9,97

The main reason why Germany achieved its prestigious position among the leading exporting countries in the world was due to its membership in the European Union. Basically, being a member of the union meant that a common monetary and fiscal policies would be adopted in order to mutually benefit all the members. The major factor was the decision of lowering the interest rate. Lower interest rate made it quite easy for German producers to increase the level of investment, followed by increase in the consumption i.e. increase in the demand for goods and services.

GROSS DOMESTIC PRODUCT OF GERMANY

The GDP of Germany is composed of approximately household consumption (55 percent), gross capital formation (20 percent, of which 10 percent in construction, 6 percent in machinery and equipment and 4 percent in other products) and government expenditure (19 percent). Exports of goods and services account for 46 percent of GDP while imports for 39 percent, adding 7 percent to total GDP.

TREND FOR GERMANY’S GDP: GARPH TO BE ATTACHED

ANALYSIS

The above diagram shows that the highest GDP and lowest GDP (negative) were experienced in year 1990(5.8%) and 2009(-5.8%) respectively. The GDP trend was stable from year 1994 onwards with the exception of years 1993, 2002, and 2003. The dramatic fall in GDP (negative) was due to the world recession during years 2008-2009. During this period of time consumers had become pessimistic about the future and so reduced their spending, thus, leading to fall in the consumption of goods and services. With the fall in demand for goods and services, there was no incentive for producers to invest in capital goods for production. Therefore, the GDP fell intensively during the period of 2008-09. The European Union members is estimated to be victim of this recession (also known as The Great Recession). However, as the economies recovered from the detrimental effects of the recession, Germany saw demand for its commodities increasing thus, leading to increase in the GDP. GDP Growth Rate in Germany averaged 0.31 percent from 1991 until 2015, reaching an all-time high of 2 percent in the second quarter of 2010 and a record low of -5.80 percent in the first quarter of 2009.

GERMAN GDP IN 2015:

Recently, Germany economy rose approximately by 0.3% in the third quarter of 2015 which lower than the June quarter that was 0.4%. In year 2015, private consumption rose by 0.6%, public consumption rose by 1.3%, gross capital formation fell by 0.3%, and Investment in machinery and equipment fell the most by 0.8%. Exports increased by 0.2%, slowing from a 1.8% increase in the previous quarter. Imports increased by 1.1%, accelerating from a 0.5% rise in the previous three months. That brought a downward effect of the GDP (-0.4 percentage points). Inventories were up, adding 0.2 percentage points to growth.

GOVERNMENT POLICIES

The economic growth (GDP) has improved due to the lower interest rate adopted by the European Central Bank. It applies to all members of the European Union including Germany. Lowing the interest i.e. adopting expansionary monetary policy has helped Germany experience positive increase in its GDP. The monetary policies adopted by the European Central Bank are expansionary to encourage investment and spending by investors and consumers respectively. The highest and lowest interest rate recorded over the past decade have been 4.75% and 0.05% respectively. Its shows the priority given to economic growth by the European Union.

THE EFFECTIVENESS OF THE POLICIES

Even though there has been a positive trend in the Germany’s economic growth rate, unemployment rate, and balance of payments over the past years, its policies has been viewed as ineffective. According to the statistics, the overall investments by Germany’s economy has reduced leading to surplus in the current account in the balance of payments account. This has caused an investment gap in the economy.

 

INFLATION

According to the data as given by databank.worldbank.org, we can see that Germany’s inflation rate has been around 2% till 2013. The European Central Bank which controls monetary policy for countries within euro zone, aims for an inflation rate at the rate of 2 percent which is optimum. The reason being that a low level of inflation rate pushes the country to use its idle resources as the income of people is increased which augments aggregate demand. This increase in aggregate demand then causes production to rise to satisfy the demand thus resulting in a healthy economy. On the other hand, high inflation rates and deflation are harmful. Deflation is dangerous because it results in reduction of wages which decreases incentive to work causing productivity to fall. To cope up with this, employers have to reduce workers as opposed to cutting pay which results in a long harmful loop. To sum it up, up till 2013, Germany’s inflation seems consistent as it is near 2 percent.

GERMANY’S INFLATION (GDP DEFLATOR)

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Percentage -0.5 1.3 1.3 1.2 1.1 0.6 0.3 1.7 0.8 1.8 0.7 1.1 1.5 2 0.6

However in some years, deflation and near deflationary rates are observed which can be seen as an alarming sign. The reasons for such a low inflation rate included continued drop in oil price by more than 50% and around 9% reduction energy prices. Price of oil fell because of surplus of oil supply over demand. This fall in price of oil has reduced the price of its complementary products leading to a lower

Cost of living and thus decreasing inflation. This slide towards deflation has raised the concerns of ECB which has implemented policies. The policies are discusses in section 4.

UNEMPLOYMENT IN GERMANY

EUROPEAN UNION (EU)

In November 2014, the unemployment rate of the European Union was approximately 10% on average. Among the members of the EU, Greece had the highest unemployment rate of 25.7% in November 2014. At that time Germany and Austria had the lowest unemployment rates. It was estimated that Germany had an approximate unemployment rate of 5.3%.

YOUTH UNEMPLOYMENT RATE IN GERMANY

According to the labor force survey, about 330,000 of its young population was employed in the year 2015. According to the federal statistical office the youth unemployment rate in the year 2015 was 7.7%

It was also observed that year 2015 had the lowest unemployment rate measuring 4.5% which was estimated the lowest since 1981.

COMPARED WITH OCTOBER OF 2014

Compared with the year 2014 the unemployment rate dropped to 10.1% while the employment rose by 0.4% which signifies a grand increase in the total employment of Germany.

In the year 2007, the Germany’s unemployment rate was above the United States and Russia, but from the year 2008 it showed a considerable decline comparatively to the United States and has tied with the Russia.

TREND ANALYSIS

From the graph below the general trend of the unemployment of Germany can be observed from 1999 to 2013, in the first five years there has been a slight variation in the unemployment rate first it decreases by 0.7% and then gets a boost by 0.7% thus coming back to the previous unemployment rate of 1999, from 2006 the unemployment fall from 7.1% to 5.3% in 2013

GERMANY Actual unemployment rate 2015

4th Quarter 2016

1st quarter 2016

2nd Quarter 2016

3rd Quarter 2020

4.5% 4.5% 4.5% 4.4% 4.4% 4.6%

Russia. The main reason for the decline of unemployment rate is its excellence in mechanical engineering industry and labor market, thus creating a room for more job opportunities.

.

LATEST TREND

At the beginning of 2015 the unemployment rate was4.8% and over the next 10 months the unemployment rate fell to 4.5%. The highest and lowest unemployment rates recorded over the past 60 years was 14.2% and 0.4%respectively.

THE REASONS FOR THE FALL IN UNEMPLOYMENT

The wage rates in Germany rose more slowly than in the other members of the European Union in the last 15 years. Therefore, the employers were able to employ more workers as their overall wage costs were comparatively lower than the members.

Germany has experienced higher employment rates over the last decade. This happened because of the increase in the demand for Germany’s exports in the world market. Its major exports consisted of machinery, pharmaceuticals, electrical equipment, and transport equipment. This led to increase in investments in the exports mainly capital goods. Consequently, this created large number of employment opportunities.

 

BALANCE OF TRADE

Overall, Germany has been able to keep a balance of trade surplus for many years, but it is important to note that Germany’s Net exports (EXPORTS – IMPORTS) have been increasing every year. We know that the GDP of Germany has been increasing consistently since the year, 2000. Also, it is interesting to see that Germany’s Balance of Trade, as a percentage of total GDP increases persistently.

The Table below shows the Relevant Data of BOT for Germany:

YEAR EXPORTS OF GOODS AND SERVICES (% OF GDP) IMPORTS OF GOODS AND SERVICES (% OF GDP)

2000 30.87300686

30.60354862

2001 31.91518782

30.14916323

2002 32.61847998

28.23739507

2003 32.6356194

28.96727634

2004 35.49440373

30.44853985

2005 37.78777276

32.72784639

2006 41.23797172

35.94172036

2007 43.05735605

36.41011748

2008 43.51756437

37.54376432

2009 37.84728045

32.91521822

2010 42.29642655

37.11243605

2011 44.80697269

39.97399133

2012 45.92428816

40.04240154

TRADE IN RECENT YEARS

In recent years the export of agriculture goods was lower than their imports. This showed that the Germany produced more investment goods and capital goods. In fact, the investment goods of West Germany were the most successful exports which led to the trade surplus. Germany posted a €22.9 billion trade surplus in September of 2015, up from €21.6 billion a year earlier and above market expectations, as exports grew by 4.4 percent and imports rose 3.9 percent. Germany posted a €22.5 billion trade surplus in October of 2015, up from €21.5 billion a year earlier, as exports grew by 3.3 percent and imports rose 3.0 percent. Balance of Trade in Germany averaged 4503.37 EUR Million from 1950 until 2015, reaching an all-time high of 25000 EUR Million in July of 2015 and a record low of -535.91 EUR Million in April of 1991. Balance of Trade in Germany is reported by the Federal Statistical Office.

WHY IS GERMANY’S TRADE SURPLUS SO LARGE?

ANALYSIS: German products are high quality products that foreigners want to buy. For that reason, many point to the trade surplus as a sign of economic success. But other countries make good products without running such large surpluses. There are two more important reasons for Germany’s trade surplus.

Firstly, the German currency (euro) might be strong when compared to the other eighteen euro zone countries, but is too weak to be stable with the balanced German trade. Because of this, the Germans are able to produce high quality gods and services at very low prices. . Also, the IMF estimated that the exchange rate was undervalued by 5 to 15 percent with respect to the inflation rate in 2014. After that, their currency fell by a further 20 percent. Therefore, Germany has benefitted after using the euro instead of deutschmarks.

Secondly, the German government has tight fiscal policies .For this reason, the people are left with low disposable incomes to spend on imported goods and services. Most of the imports of Germany are consumer goods for example Food.

SECTION 3

Germany’s inflation rate has been dropping and in November 2014 dropped to a scanty 0.6 percent. The annual rate of inflation was 0.1%, and it is the lowest increase in inflation rate in more than 5 years as THE FEDERAL STATISTICAL OFFICE (DESTATIS) confirmed it. Destatis is a Federal authority of Germany.

The fall in Germany’s inflation rate depicts the condition of euro zone as it is the largest economy in the euro zone. Some countries like Spain and Italy have already fallen into deflation, and now Germany’s decreasing inflation has coerced ECB to react.

The risk of incessant low inflation rate is that it causes people to wait for prices to fall down even further and defer their spending. This low demand decreases the incentive for businesses to invest and thus creating unemployment. All this then starts a harmful loop causing the GDP to fall.

 

SECTION 4

To increase the inflation, the ECB has proposed and implemented the following policies.

FIRSTLY, it has lowered its interest rate to 0.05 percent. However the low interest rates were not sufficient enough to pull the economy out of deflation, so ECB thought of another policy.

SECONDLY, it has started the program of quantitative easing by buying government bonds. Quantitative easing means to increase the money supply in the economy. The proposal was announced in January and contained an asset purchase program (buying government bonds) of 60 billion Euros each month, until September 2016. The total value is expected to be 1.1 trillion Euros. Once inflation rate increases, ECB will again devise its policies to maintain stable prices and inflation rates. It is necessary for ECB to react on time as this quantitative easing can result in hyperinflation because it becomes almost impossible for supply to offset a huge increase in demand.

The purchase of bonds will reduce the interest rates so that consumers and firms will borrow and spend or invest more. The increase in expenditure of consumers means an increase in demand, ultimately resulting in more production. This production also creates more employment, simultaneously increasing demand too. However, at one point demand will exceed the supply which will result in the rise of prices (inflation). The increase in money supply also means that Euro’s value will depreciate when compared to other currencies. This will inevitably lead to an increase in demand of exports and decrease in demand of imports. Both of these will affect the demand for domestic goods which will rise; however, supply won’t be able to cope up with the demand so prices will increase.

However, a conflict of perspectives arises between the Central bank of Germany (Bundesbank) and European Central Bank. The Bundesbank believes that there was not a need for ECB to have taken such drastic measures as the low inflation rates are just temporary. According to them, the low energy costs have reduced the cost of production for businesses and on the other hand increased the purchasing power of consumers which is healthy for the economy.

Even though Bundesbank has different view on this issue, it still has bought 12.5 billion Euros of debt securities in the first three months of the year.

Perhaps Germany being a victim of hyperinflation in 1920s made Bundesbank oppose to quantitative easing, but when assessing the results of bond buying program of half a decade of Federal Reserve (Central Bank of United States), we can say that hyperinflation will not necessarily occur as it didn’t in Federal Reserve’s plan of bond purchasing.

References

Databank.worldbank.org/data/home.aspx

(www.dw.com), Deutsche. ‘ECB Begins Economic Stimulus Program | News | DW.COM | 09.03.2015’. DW.COM. N.p., 2015. Web. 13 Dec. 2015.

BBC News,. ‘German Inflation Falls To Five-Year Low – BBC News’. N.p., 2015. Web. 13 Dec. 2015.

Destatis.de. ‘Press Releases – Consumer Price Index in September 2015 Expected To Remain Unchanged From September 2014 – Federal Statistical Office (Destatis)’. N.p., 2015. Web. 13 Dec. 2015.

Marketnews.com. ‘Bundesbank: German Econ Will Continue to Grow in Next Month’s | MNI’. N.p., 2015. Web. 13 Dec. 2015.

Reuters,. ‘ECB Has Made No Changes To Bond Buying During Sell-Off Say Traders’. N.p., 2015. Web. 13 Dec. 2015.

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