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Celebrating Germany’s recession dodge? The data isn’t quite as solid as you think

Celebrating Germany’s recession dodge? The data isn’t quite as solid as you think

Ardent Remainers had a rare bit of good news at the end of last week.

The latest statistics for the German economy showed that, contrary to expectations, it had not fallen into recession in the July-September period.

Economists have come to define a recession as a period when a country’s GDP falls for two quarters in succession. There is no firm scientific basis for this — it has simply emerged over time as a consensus among the members of the profession who follow these things.

A more decisive indicator is if the economy shrinks compared to the same quarter in the previous year. A cynic might say that the less stringent definition, a fall for just two successive quarters, gives economists more to write about, as such events are more frequent than year-on-year falls.

Still, the two-quarters fall is the definition commonly used. German GDP fell in the second quarter, April to June, but it rose — by all of 0.1 per cent — in the third quarter. A recession has been avoided, and Remainers were relieved by the demonstration (if weak) that the EU’s powerhouse economy was not in decline.

Not so fast. We should take economic statistics such as the growth of GDP with a firm pinch of salt, and remember that, outside of the financial markets, almost all economic data is estimated.

We cannot put the economy onto a set of scales and weigh it. Its size has to be estimated, using a wide range of basic information and assumptions. And that means that the numbers cannot be taken at face value.

For example, commentators noted that the fall in German GDP in the second quarter had been revised, from minus 0.1 per cent to minus 0.2 per cent.

Changes of this magnitude are small fry. The US has probably the most sophisticated system for estimating the so-called national accounts — the maze of economic statistics which make up the economy. Yet during the depth of the financial crisis, in the fourth quarter of 2008, American GDP was initially estimated to have fallen by 6.4 per cent at an annual rate. As more information came to light, over a period of years, the figure is now believed to be a drop of 8.2 per cent.

And this is by no means the biggest revision which has been made. In the recession of early 1975, for example, GDP was initially thought to have fallen 11.4 per cent in the first quarter.  The figure was eventually revised to just 4.7 per cent.

These revisions are inevitable given the assumptions — many of them arbitrary — that have to be made in economic analysis. How do we measure the output of the armed forces, for example, or civil servants? There is no market in which these outputs are sold which might give us some clue. The answers are provided by a set of conventions.

Economic statistics therefore paint a broad picture and do not have the precision with which the media has come to treat them.

As a rule of thumb, quarterly GDP growth of 0.5 per cent or above is a sign of a healthy economy. The German data shows that, in terms of the big picture, the economy is currently struggling, regardless of whether an individual estimate is plus 0.1 or minus 0.1.

As published in City AM Wednesday 20th November 2019 
Image: The German Volke via Pxhere licensed for use  CC0 1.0
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The demise of Germany’s Social Democrats reflects the challenge for all liberal parties

The demise of Germany’s Social Democrats reflects the challenge for all liberal parties

The German elections on Sunday went pretty much according to the polls. Another victory for Chancellor Merkel.

Much of the commentary has focussed on the success of the far-right Alternative fur Deutschland (AfD) party. One of its leading candidates eulogised the German armed forces during the Second World War – a topic even more sensitive topic there than it is here.

The AfD took nearly 13 per cent of the vote and 94 seats in the Bundestag. This puts them within striking distance of the Social Democrats (SPD). The SPD share of the vote collapsed to just over 20 per cent, barely half the support it attracted only a decade ago.

The Social Democrats – the German equivalent of Labour in the UK – were annihilated not just in areas like Bavaria where traditional centre-right parties have always been strong. They lost very heavily in the old East Germany, where the AfD secured its highest level of support.

It is no accident that the rise of the AfD and the fall of the SPD go hand in hand.

A popular myth among the liberal elite in Britain is that our country has an exceptionally high level of inequality compared to the rest of Europe. This far from being the case.

The same forces which have widened inequality here have operated in Germany, in some ways even more powerfully.

The opening up of Eastern Europe in the early 1990s has had a strong effect. Employers soon realised that economies such as Poland and the Czech Republic possessed educated labour forces, whose productivity potential had been suppressed by the gross inefficiencies inherent in planned economies. German companies opened up new production plants in the old Soviet bloc countries in Europe rather than at home.

This has been combined with the impact of both globalisation and mass immigration.

The effect on wage rates of this increase in competition in the labour market has been dramatic. Christian Dustmann at UCL has examined the evolution of wage rates in the former West Germany.

The fifteenth percentile of the wage distribution is the level at which only 15 per cent of wages are lower. In West Germany, at the fifteenth percentile, real wages have fallen almost continuously since the mid-1990s.

At the fiftieth percentile, where half get more and half get less, the reduction has been less sharp. But the fall had set in by the early 2000s.

At the eighty-fifth percentile, we see the mirror image of the fifteenth: real wages grew strongly, reaping the benefits of the recovery of the economy.

In the states of the old East Germany, the problems are even worse.

The sharp rise in inequality is a key reason for the collapse in support for the social democratic parties across Europe. Their traditional voters have been the ones who have been hit the most by static or falling real incomes. They have not been defended by social democrat parties, which now represent the interests of the public sector urban professional classes.

The fact that Jeremy Corbyn’s Labour did not suffer the same fate as Germany’s SDP is a clear indictment of the Conservative campaign in the election.

As published in City AM Wednesday 27th September 2017

Image: Martin Schultz by Olaf Kosinsky is licensed under CC by 3.0
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