World economies

Published October 13, 2014

Germany

Germany is Europe’s largest national economy in terms of GDP on the basis of purchasing power parity. In 2013, it had a trade surplus worth $270bn. The service sector contributes around 70pc of the total GDP, industry 29.1pc, and agriculture 0.9pc.

The country is the largest producer of lignite in the world. It is also rich in timber, iron ore, potash, salt, uranium, nickel, copper and natural gas. The size of the economy in GDP in PPP terms was $3.27trn in 2013.

In 2014, Germany’s economy contracted slightly by 0.2pc in the second quarter, triggering some concern of the risk of recession, due to weak exports and falling investment. According to the German Federal Statistical Office, Destatis, its GDP shrank for the first time in more than a year. Destatis also revised down the first-quarter growth from 0.8pc to 0.7pc.

Fears intensified that the country could have entered technical recession – defined by two consecutive quarters of contraction – after its economy suffered its biggest slump in industrial output since the beginning of the financial crisis. The industrial output in August slumped 4pc, the biggest since January 2009.

According to Christian Schulz, senior economist at the German bank Berenberg, the continued decline in industrial production suggest that GDP will not grow much in the second half of the year.

A significant rebound in manufacturing and thus investment is unlikely to come through before early 2015. That will significantly reduce the annual growth forecasts for 2014 and 2015. Germany could grow less in 2014 than the 1.8pc forecast by the government early this year but it still remains in good shape compared to its EU partners.

Several media reports reveal that the developing global crises have started to hit German consumption. The data shows weakening consumer and business confidence. An Ifo shows that confidence in Europe’s largest economy is the lowest it has been for some time. Falling for the fifth consecutive month in September. Ifo Business Confidence Index slumped to its lowest level in 18 months dragged down by mounting global tensions.

Consumers’ slumping mood, reflected in German market research group GfK’s latest report, reveals a fall in Consumer Confidence Index from 8.6points in September to 8.3points in October. The Germany’s Labour Agency offices reported that the unemployment rate was up by 0.1pc to 6.7pc in August.

A Reuters report quoting Finance Minister Wolfgang Schaeuble stated that Ger­many would not take on new borrowings next year for the first time since 1969, underlining the robustness of the country’s finances as European partners urge it to do more to boost euro zone growth.

Germany needs to look into new types of public-private partnerships as private investment is needed to maintain the economic performance and competitiveness. Germany is in dire need of investment itself, with total annual investment levels of around 17pc of GDP — below the average of over 21pc in other industrialised countries.

France

France, the eurozone’s second-largest economy, is unlikely to see a real upturn in 2014 while battling through a deep economic crisis. It has failed to deliver any growth for the second quarter in a row with almost sky-high unemployment. It is expected to barely grow in third and fourth quarters at 0.1percent.

According to the national statistics agency, INSEE, the economy is heading for a growth of only 0.4pc this year. For 2015, however, the Finance Minister Michel Sapin has predicted 1pc growth. But the High Council of Public Finances has stated that poor recent data does not point to the rapid pickup in activity needed to reach a 1pc growth rate next year.

The Finance Minister expects that public deficit would stand at 4.4pc of GDP in 2014. Spending cuts in 2015 should help the government cut the public deficit to 4.3pc next year, 3.8pc in 2016 and only reach 2.8pc in 2017, according to the 2015 budget draft.

The European Commission had granted France two extensions on its deficit-cutting targets with the target date most recently reset at 2015.

France was to cut its structural deficit by 0.8pc of GDP in 2014 and the same in 2015. The latest budget plans announced by the French government, however, foresees the 2014 structural deficit to fall by only 0.1pc this year, compared with the EU target of a 0.8pc cut.

EU officials point out that France has not taken effective action to meet its obligations and reduce its structural deficit. Several euro zone officials think that the European Commission is likely to reject France’s 2015 budget draft.

France’s central state budget deficit rose in the first eight months of the year as tax receipts declined and the government put money into investment programmes. The central state budget deficit — which doesn’t include the social security system and local authorities — stood at 94.1bn euros at the end of August, compared to 93.6bn euros at the same time last year.

Tax revenues for the central state fell in the first eight months of the year to 186.1bn euros from 190.8bn euros. Spending over the same period fell 3.6bn euros to 253.9bn euros.

The central state deficit, which also includes the deficits of local authorities and the social security system, will rise this year as the French authorities doubt meeting its pledges due to the weak economy.

The government claims that it would stick to its promise to cut 50bn euros ($65bn) from France’s big public spending bill over the next three years, while easing the tax burden on nine-billion taxpayers to the tune of 3.2bn euros.

Despite signals by the government that it may ease planned cost-cutting measures, it would stick to its target of 21bn euros ($27.2bn) in spending cuts in 2015. According to INSEE, the unemployment rate was likely to climb to 10.3pc by the end of 2014.

Published in Dawn, Economic & Business, October 13th, 2014

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