Just a tiny recession
GERMANY had a very good 2011. Its economy grew by 3% on the year, helping bring unemployment down from nearly 7% to just 5.5% (as of November). No other large, developed economy performed nearly as well. If the Germans are tempted to pat themselves on the back and celebrate, however, they should think twice. Growth peaked back in the second quarter and slowed sharply thereafter. Odds are good, in fact, that the German economy shrank in the last three months of 2011. Low unemployment should boost consumer spending and provide domestic demand support to growth, but exports remain Germany's bread and butter. Private consumption rose by 1.5% in 2011, compared to an 8.2% jump in exports. And Germany's export markets are in trouble.The largest destination for its goods is obviously the euro zone. The single-currency area is descending into a dangerous recession. Since much of the euro zone is desperately trying to move from current-account deficits to current-account surpluses, the recession will be longer and deeper the more Germany manages to protect its net exports. Germany's surplus with Europe can only decline.America is the next largest customer and seems likely to have a better (though not obviously great) 2012. Then comes Britain, which is probably back in recession. And then China. China's still growing, you say, and you're right. What's more, its trade surplus shrank nearly 15% in 2011, as import growth outpaced export growth. China's growing import appetite helped pace the rapid German expansion in the first half of last year. But:China’s import growth fell to a two- year low in December, underscoring a slowdown in the fastest- growing major economy that deepens risks for the global outlook...Weakening import growth may undermine China’s ability to lead the recovery as it did after the 2008 crisis. The nation’s expansion may slide to 7.7 percent this quarter, the slowest pace in three years, according to a UBS AG forecast. “There will be a ripple effect on the rest of the world, particularly those who rely on China’s imports..."I've been talking about the nature of liquidity traps, in which borrowers suddenly face much tighter constraints and growth declines if savers can't be convinced to pick up the demand slack. The euro zone is facing a challenge something like that. The periphery is being forced to rapidly increase its savings. In the absence of a big increase in consumption elsewhere, a deep recession will result. Now, that consumption doesn't necessarily have to come solely from Germany; the euro zone is an open economy, and it can boost demand by raising its net exports. There are lots of other economies trying to do the same thing, however. Germany wants the rest of the euro zone to become more like it, but is it ready to accept that such a transformation would force Germany to become less like itself and more like the coarse, consumption-hungry Americans?In coverage of Germany's growth figures and elsewhere, one can't help but hear forecasts that call for a short euro-zone recession in 2012. I find that a difficult forecast to believe. Europe is forcing itself through a significant structural transformation that can't occur overnight. Meanwhile, recession will make deleveraging that much more difficult for the periphery, and will increase the odds that something breaks.