European Economy. Economic Papers. Germany's growth performance in the 1990's

1. Growth of the German economy in the 1990s: stylised facts
1.1 After the re-unification boom: Germany’s business cycles in the 1990s
1.1.1 Output growth
Economic activity in Germany in 2002 continues to be disappointing. With an estimated
growth rate of ¾%, barely higher than the 0.6% in 2001, Germany will yet again carry the
red lantern among EU countries. This worrisome pattern for the largest EU economy persisted
throughout the 1990s. In understanding this pattern, two questions will have to be addressed
separately. First, it needs to be explained what ended the present business cycle and what
general role short-term factors play in the German economy. Second, as the long-term growth
potential of Germany is very low, it needs to be analysed what holds back potential growth
factors. This sub-section starts with the short-term factors.
Since 1992 economic forecasters have been projecting a longer lasting recovery in Germany,
sparked off by strong export growth. Up to now, however, so-called external shocks impede
an acceleration of growth. This leads to a pattern of very short and flat economic waves. In
1994/5, the incipient recovery was stifled by a sharp appreciation in the nominal exchange
rate and high wage increases. In 1997/98 Germany was sucked into the turbulence caused by
the Asian crisis. In 2000, the sharp increase in oil prices and a sharp downturn in the stock
markets choked off demand.
As Figure 1.1 shows, 2001 clearly marks the end of what is already the third full business
cycle after German re-unification. With troughs in 1992/3, 1995/6 and 1998, the average
length of a business cycle in the 1990s is a mere three years long
1
. This distinguishes the
German growth pattern clearly from the business cycle in the USA, which lasted longer than
the full three German cycles combined. The German cycle is also substantially shorter that
those of most other European countries, with the exception of Italy, the other European
country that shows particularly weak growth in recent years. France, for instance, basically
skipped the 1998 recession experiencing only a mild slowdown in growth. This means that in
France the time from 1995 until 2001 forms part of a single cycle. Before 1998, growth in
Germany, France and Italy went in parallel. Since then, France set itself apart form the two
other countries. The pattern of 1998 might repeat itself in the present downturn: Germany
already practically stopped growing since the third quarter of 2000. Quarterly growth in the
six months from the third quarter of 2000 until the forth quarter of 2001 averages 0.05%. By
contrast, average quarterly growth in France during this period, even though also levelling off
recently, remained at 0.4%. It is therefore of particular interest to analyse the present and
previous cycle and take a look as to how France avoided the sharp cyclical downturn.