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Germany and Japan: similar economies, different election results

Economics Weekly: Economic Research and Analysis: Germany and Japan: similar economies, different election results

The world’s second and third largest economies, Japan and Germany, respectively, have shown virtually stagnant growth for almost a decade. Both economies also face great challenges of adjustment from globalisation and the newly emerging giants of China and India, though are also currently benefiting more than many countries from their emergence. But general elections in recent weeks showed respective electorates delivering very different mandates to their governments. In Japan, there was a decisive mandate for radical change; in Germany, a so called ‘grand coalition’ between the 2 biggest parties seems the most likely outcome from an election that did not produce a clear result. Another election may even be called if there is no agreement. We look at recent economic trends in the last few years for some insight into these results and what they mean for reform in each country.

Japan edges ahead in growth stakes…
As chart A shows, both economies have been growing weakly in real, inflation adjusted terms, and experienced recession in the last five years. But whereas the Japanese economy has been recovering since its recession ended, the growth downturn in Germany not only persisted for longer (though it was not as deep) but the recovery has been weaker than Japan’s. Chart B suggests why this is, with Japanese consumer spending seeming to exhibit a slightly faster growth rate over the period in real terms, and especially in the last year when it rose sharply. This was critically just ahead of the elections. The effect in Japan would have been to boost the party in power that did want radical reform and hit the opposition party, which did not. In Germany, the effect of weakening consumer spending should have been to boost the opposition party but it did not seem to, though they did win 1% more votes than the incumbent party.

...but manufacturing stronger in Germany
Industrial production seems to tell a slightly different story, however. Growth in German manufacturing output has been faster than that in Japan in 2005, after being weaker in the preceding three years, see chart C. A recovery in German manufacturing is mainly being driven by growth in exports to the emerging markets, and growth generally in the world economy. Last year, Germany overtook the US to become the world’s biggest exporter of visible goods. Japan remains the world’s third biggest exporter and, moreover, output growth is only weaker in annual terms because the rise last year was so strong it could not be bettered this year. For both economies, the major engines of growth have been China and the US.

Price deflation is ending in Japan
Price deflation is ending in Japan but price inflation is accelerating in Germany, see chart D. This may have an impact on consumer confidence that could have favoured the incumbent in Japan. Consumer spending growth there could benefit from a perception that the decade long period of falling prices is over, so the message to consumers is get goods now before they cost more, rather than the situation in deflation when wait because they could cost less is the message. But is not clear that the differences in the trends of inflation are big enough to lead to a change in perception of price stability sufficient to impact general elections.

Unemployment is higher in Germany
It is in the unemployment rate that the differences between the two economies in the last 2 years is most marked. Unemployment (however measured) is falling sharply in Japan, and has been doing so since 2003. In Germany, by contrast, the unemployment rate is just about falling from its post war peak. Moreover, it started rising quite sharply in the second half of 2004 and has not even reversed that increase in any significant way in 2005. This seems to suggest that despite faster growth in manufacturing output the benefits are not yet being seen in German labour markets. One reason for this seems to be that investment spending is much weaker in Germany than in Japan, see chart F.

What lies ahead?
Unemployment may be one economic effect we can draw possible election conclusions from. Workers could have been fearful of further reform in Germany, as it may have led to further job losses. Those not in work might have even been fearful of cuts in social security, as taxes were cut. Employers may be reluctant to invest in Germany because of lack of market reform. This is as it may be; it is difficult to gauge just how the economic data we have analysed really impacted the election. It could simply have been that in Germany there was a charismatic person leading the party against more reform, and his presentation was better than that of the opposition, whereas, in Japan, it was the opposite way round. The one campaigning for reform was judged the more charismatic person. The fact that the economy in Japan supported his election may not have been a key factor. What we can say is that economic recovery seems most entrenched in Japan, and that the results of the recent election there tend to support this becoming more so. Whilst Germany has also shown faster growth in the last year, driven by manufacturing, further reform may be required to give it a more durable impetus. The economy may now drift until the political situation becomes clearer.

Economic indicators
UK economic data are likely to show that the economy recovered in Q2 but retail activity remains subdued. CBI distributive trades’ survey data for September could have worsened, according to some retailers. But there could be some signs that consumer and mortgage borrowing is recovering from recent depressed levels, see data on Thursday. It is not clear whether the panic over petrol supplies has hit consumer confidence. Gfk consumer confidence survey data, on Friday, might show some deterioration but could also rebound.

Trevor Williams, Chief Economist
trevor.williams@lloydstsb.co.uk
www.lloydstsbfinancialmarkets.com
Lloyds TSB Bank,
Financial Markets
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