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1.1.2 The recovery of 1995/98
The starting point of the previous cycle in Germany was the 1995 recession, when export
growth was choked off as a result of a sharp increase in German wages and the Mexican peso
crisis, which was accompanied by a significant appreciation of the DEM. The end point is
marked by the slowdown in 1997/8. Again an external shock set off the end of the period; this
time it was the Asian crisis. The 1995/98 cycle appears to be highly typical for the German
situation in the 1990s, as both its beginning and its end are triggered by external events, with
domestic policies, notably in the labour market, contributing their share to aggravating the
situation.
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A recession is most frequently defined as two consecutive quarters with negative growth. As over the long
run a market economy usually grows, this definition is generally not useful in defining a growth cycle, as it
would only apply to the 1992 recession. As a pragmatic definition, we use here two consecutive quarters
with less than 0.2% quarterly growth.
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Figure 1.1: Quarterly real growth rate in Germany
A look at the data shows a fairly clear pattern (Figure 1.2a): Exports contributed to kick-
starting the economy. For about two years, the brunt of the growth was borne by the foreign
contribution, while domestic demand played only a relatively weak role in the early years of
the cycle. The growth contribution of the external balance until the end of 1997 is over 40
percent. This means that instead of growing with an average rate of 2% over the two year
period, Germany would have grown only at a rate of 1.2%, which hardly constitutes a boom.
In fact, the significant impulse coming from the external contribution never really translated
into domestic demand. As soon as the unsustainable external contribution of annually 0.8%
subsided, respectively turned negative, the mini-recovery collapsed and quarterly GDP
declined by 0.5% in the second quarter of 1998. Put in extreme terms, the Asian crisis did not
halt a recovery. As far as domestic demand is concerned, a recovery never took place.
A disaggregation of domestic demand into its components reveals that the problem of weak
demand is not so much found in equipment investment, which grew over the same period by
about 6% annually. Rather, private consumption remained very slack throughout the period. It
only grew at an annual rate of 1.2% over the two-year period. More importantly, most of that
impact only came in the last two quarters of the cycle—not enough to lift Germany onto a
sustainable growth path. The underlying reason is that, during the period under consideration,
real disposable income barely rose by 1%. One important aspect is that despite rising wages, a
rise in the wage sum was held back by a reduction in employment by 0.5% during the cycle,
because the growth rate during 1996/7 was not enough to generate employment growth. This
situation was aggravated by a rising tax burden.
The same period in France presents itself completely differently (Figure 1.2b). Just as in
Germany, the upswing was triggered by a strong contribution of net exports. Here, however,
the similarities end. Right from the beginning, private consumption bore a significant share of
the upswing, while investment initially provided no impulse to growth or was even negative.
After six quarters the boom in France became self-sustained with both consumption and
investment picking up speed. At this point France had entered the virtuous cycle of rising
employment, rising income and higher domestic demand. While the Asian crisis affected also
the French economy from 1998 onwards, the country benefited from the fact that it had
reached a self-sustaining growth path by that time. Consequently, the crisis is visible only as a
blip in an otherwise much more resilient growth process.
Quarterly growth
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Recession
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