Friday, February 13, 2009

Germany's Surprising Job Growth

Euro area GDP fell 1.5% in the fourth quarter, according to preliminary estimates, which in the American way of expressing growth would be a 6% annualized decline. Compared to Q4 2007, the decline was 1.2%. Of the specific countries that have released estimates, Cyprus, Austria and (perhaps surprisingly to many, given the riots there) Greece performed strongest while Germany as well as the constant laggards Italy and Portugal posted the biggest declines.

What is perhaps most surprising is the fact that despite the decline in GDP by 1.6% in Germany compared to Q4 2007, employment actually rose by 1% in the year to the first quarter. Compare that to the United States that saw a much smaller 0.2% GDP decline in the year to the fourth quarter, but still saw employment drop by more than 2%. But how could job growth be much stronger in Germany if Germany has a steeper economic contraction? There are four possible explanations for this.

1) GDP is actually stronger in Germany and/or weaker in the United States than these very preliminary numbers suggest, something which might be evident in coming revisions.

2) Employment is actually much weaker in Germany and/or stronger in the United States than these very preliminary numbers suggest, something which might be evident in coming revisions.

3) Germany has had more beneficial changes in its terms of trade, meaning that its official headline numbers underestimate its strength relative to the United States.

4) United States has stronger productivity growth than Germany.

Personally, I think it is a combination of these factors, or at least factors 1,3 and 4 (Though it can't be ruled out that German job growth is overestimated).

Many recent numbers suggest that the U.S. fourth quarter GDP was in fact much weaker than the preliminary estimate, and so will be revised down, beginning in the next U.S. release and probably continuing in the annual revisions. Historically, later revisions have also had a tendency to revise down U.S. GDP, while European revisions have if anything had the tendency to revise up GDP.

No terms of trade numbers are available for Germany yet, but the imputed inflation rate for GDP does look suspiciously high (over 2%, when the CPI has increased only about 1.5%), suggesting a terms of trade gain for Germany. By contrast, the U.S. terms of trade didn't change for the period as a whole.

And the great real wage gain for U.S. workers was probably not just reflecting falling corporate profits but also rising productivity.


Blogger said...


Not related but anyway. Would you consider doing a post on the Russian reaction to the commodity and oil prices slump? They devalued the Ruble aggressively and looking back at the depression, such a devaluation mitigates job losses due to the export slump and puts the country in a better position for a recovery. Or do you not agree?

4:11 PM  
Blogger stefankarlsson said...

Marc, I answered a similar question in the Q&A section (Which is where you should post future questions unrelated to any recent post) regarding the use of devaluations during the Depression, and the answer was this:

"Well, that theory is probably actually correct in the sense that monetary inflation after a period of monetary deflation did produce a short-term upswing. But that doesn't mean that the long-term effects of new inflation were good as it helped sow the seeds of a new crisis. The only permanent positive effects it could create would be by lowering too high real wages in a hidden way after government intervention had prevented sufficient reductions in real wages in the more open form of nominal wage cuts."

Russia does not have a comparable situation with monetary deflation, so the short-term positive effects will likely be much smaller. Any such effects will also be temporary and have later negative side-effects, except to the extent that it can lower real wages that because of nominal wage rigidity is too high.

9:28 PM  

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