In giant halls on a sprawling site in northern Germany, an army of builders is constructing exhibition stands for almost 5,000 companies attending the Hanover trade fair. Some are three storeys high, with private dining rooms for entertaining the most valued customers.
Since 1947, when it was established by Germany’s British postwar administrators, the fair has been a show of Teutonic industrial strength. This year it will cover an area 16 per cent larger than that of 2010. Boosting the numbers are almost 500 exhibitors from China – this year’s "partner country” – albeit in stands noticeably less showy than those of their hosts.
The 200,000 or so visitors expected in coming days will notice two things. First, how much Germany’s economic fortunes have become linked to China’s; exports to the country were worth €65 billion last year, more than double the 2007 level.
The second thing they are likely to remark upon is the upbeat mood in Europe’s largest economy. Germany’s success is the flipside of the eurozone's debt woes: low interest rates, a flood of inflowing capital, steadily rising global demand for its products and a weakening exchange rate have created some of the best trading conditions for years. "Nobody would have believed how strongly Germany would come out of this crisis,” says Wolfram von Fritsch, chief executive of the Hanover fair.
German joblessness has fallen to just 2.8 million, or 6.7 per cent of the workforce, the lowest since reunification in 1990, "which at a time of crisis is something pretty unique”, says Otmar Issing, former chief economist at the European Central Bank. Business confidence indicators are climbing back towards record highs.
The question on the minds of exhibitors, and policymakers around the world, is whether it is too good to last. Germany getting it right "matters a lot”, says Marco Annunziata, chief economist at General Electric in the US. If good times persist, the country’s labour market success "might hold some lessons even for the US”. But if Germany slips, "the eurozone would find it even harder to navigate its financial crisis, with potentially disastrous global repercussions”.
Caution is warranted. For all its industrialists’ bravado, experts say there is a risk that German gross domestic product data next month could show the country was in technical recession – two quarters of decline – around the turn of the year after a collapse in economic confidence caused by last year’s escalation of the eurozone debt crisis.
While most economists expect a pick-up this year, it is unlikely to be strong, weighed down by fiscal austerity measures hitting demand across the rest of the eurozone. Constraints created by an ageing population and a sluggish, over-regulated service sector mean long-term growth rates will remain modest at best. Its politicians fiercely oppose attempting to boost growth with big tax cuts or higher public spending – oblivious to global concern that their insistence on fiscal prudence across Europe is driving the eurozone into deeper trouble.
Issing argues the country has become "a model for Europe... The lesson learnt from Spain, Italy, Portugal – not to mention Greece – is that sustainable growth comes only if the economy is flexible enough”. But he worries Germans are becoming complacent and that the push for greater efficiency in, say, the pension system or labour markets is losing momentum. "My concern is that, because Germany is doing so well, it is already starting to endanger its future.”
Without the dynamic expansion in exports to China, growth in German GDP would have been about 0.5 percentage points lower (equivalent to €13 billion) than the 3 per cent reported last year, according to calculations by Italian bank UniCredit.
The two economies are increasingly intertwined: Germany has the knowhow, China the mass market. But behind the smiles at Sunday’s formal opening – with Wen Jiabao, Chinese premier, joining chancellor Angela Merkel in Hanover – will be fears the embrace has become too strong. Visitors to the fair will be able to tick off icons of the Mittelstand, Germany’s industrial heartland, now in Chinese ownership: Putzmeister, which employs 3,000 making concrete pumps, was acquired in January, for example.
Worryingly, China's growth has shown signs of slowing recently. If it suffered a "hard landing”, warns Andreas Rees of UniCredit in Munich, "it would undoubtedly be bad news for the German economy... You cannot have your cake and eat it: that is, benefit in the good times but not be hurt in the bad times”.
For now, such doomsday scenarios seem unlikely. For a start, say Rees and other economists, the Chinese slowdown is unlikely to be abrupt. Moreover, as Chinese demand has weakened, other countries have picked up the slack. Growth in exports to Russia last year actually outpaced growth in those to China. "German exporters are pretty diversified. They have their niches, so it doesn’t matter where global growth comes from – so long as there is global growth,” says Dirk Schumacher of Goldman Sachs in Frankfurt.
Commercially, what happens to Greece, for example, is irrelevant – German exports there last year were just 0.5 per cent of the total – unless eurozone problems create a broader threat to global economic confidence.
German industrialists have also become more "shock resistant”. When the failure of Lehman Brothers at the end of 2008 led to a collapse in demand for the country’s goods – and the economy contracted faster than most other industrialised countries – workers were not sacked on a grand scale as in the US. Encouraged by subsidies for Kurzarbeit, or short-time working, companies instead hoarded labour. As a result, domestic demand remained stable, allowing a quick rebound. "The difference today compared with 2009 is that industry has learnt to cope with short, deep crises,” says von Fritsch. "Such crisis experience creates a calmer mood.”
The effects of German success are spreading, helping counter criticism it is doing too little to help neighbours. In a report last month, the Bundesbank noted the current account surplus with other eurozone countries had fallen from a peak of €108 billion in 2007 to just €57 billion last year. "As a result, almost half of the surplus that built up from a practically balanced position in 1999 has been dismantled since the beginning of the financial and economic crisis,” it concluded.
Much of the fall reflected weaker demand from crisis-hit European countries. But the Bundesbank argued neighbours benefited, for instance, by supplying parts to German manufacturers. It cited subsidies for car purchases during the 2009 slump, which boosted demand for foreign vehicles. The central bank could also have noted a more recent surge in wine imports from southern Europe – sales of Spanish wine were up 20 per cent last year. "Germany has been the transmission mechanism by which the eurozone benefited from Chinese growth,” says Schumacher.
All of which has convinced Germans that their economic model is pretty nicely pitched. Almost a decade ago Hans-Werner Sinn, president of Munich’s Ifo economic institute and one of the country’s best-known economists, wrote a book entitled Can Germany Be Saved? The country was underperforming compared with other eurozone economies, with high wages undermining competitiveness and unemployment soaring.
Today, Sinn has a clear answer to his question. Germany "has been saved”, he says. "The demographic problem, the high costs in the new Lnder [eastern Germany], are still there. But the problems of west Germany being too expensive, with wages too high, has been resolved... What helped was that other countries inflated away from Germany. That has contributed greatly to Germany’s success.”
Another crucial element was the labour reforms undertaken by the Social Democrat-led government of Gerhard Schrder, chancellor until 2005, and a push by companies to increase flexibility in the workplace.
Europe’s economies are clearly rebalancing, Sinn maintains. "Capital markets have now understood that you can burn a lot of money in southern Europe. Germans’ savings, which previously drained to the south, often via the French banking system, now prefer to stay in the safe home haven, even if the rate of return is less. This has been the driving force behind Germany’s boom of the past two years.”
Much growth in the past two years has been driven by a rebound in investment spending and construction activity. Consumer spending has also accelerated, though it remains modest by the standards of the US and UK consumer-led economies.
Some in Germany even fret about "overheating”. The Bundesbank has expressed concern about property prices, which rose 5.5 per cent last year. Such talk still seems premature given that house prices have been flat for a decade. But there are signs of cost pressures building. With unemployment tumbling, trade unions have stepped up demands for higher wages. After weeks of sporadic industrial activity that paralysed public transport across the country, Ver.di, the services industry union, last month secured a 6.3 per cent pay rise over two years for 2 million workers.
Economists at institutions such as the OECD argue that further extensive structural reforms are needed to ensure Germany’s economy can continue to grow at a fair clip without excessive inflation. These include greater liberalisation of the service sector and steps to encourage women to work longer hours. The average working week of a German woman is at present among the shortest in the industrialised world. "Still more needs to be done to strengthen the growth potential, not least in view of rapid population ageing,” the OECD warned in February. The risk is of escalating costs of the elderly falling on a contracting workforce.
Despite his optimism, Sinn warns of a looming demographic crisis. "Of course, you can offset population ageing with immigration. After 10 years of low immigration and even emigration from Germany, the euro crisis has reversed everything... We have an immigration wave from other European countries. That will of course help the economy to grow – but it can’t make up totally for the lack of babies.”
Such concerns are evident in Hanover. One of this year’s highest-profile exhibits is a robotic exoskeletal hand worn like a glove by older production line workers to amplify the power of their finger muscles so they can work longer. More than 10,000 school children will tour the trade fair on trips designed to nurture enthusiasm for engineering. German industrialists – like Chinese planners – think long-term.
Copyright The Financial Times Limited 2012.