Essay: 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

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