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Should the UK be taking a leaf out of the German economic handbook?

  • 27 February 2012

Yet, the most recent GDP data found the German and UK economies at level pegging. Both economies slid 0.2% in the final quarter of 2011, though the areas of strength and weakness were markedly different in both countries. Does the recent GDP data provide any clues as to whether Umunna is right, and whether the UK should indeed be taking a leaf out of the German economic handbook?

Certainly Umunna's analysis of the relative performance of the two economies since the credit crisis suggests that the UK could do worse than ape some of Germany's economic tactics: "Both the UK and Germany were hit hard by the 2008/09 global downturn but the story of our countries since has been markedly different. Our economy contracted by 4.9pc in 2009, returning to growth of 1.4pc in 2010…It has since flatlined near the 0pc mark… Conversely, the German economy contracted by 4.7pc in 2009 but quickly bounced back with strong GDP growth of 3.6pc in 2010 and 3pc growth in 2011 despite trouble in the eurozone. And according to figures released last week, GDP in Germany is now 0.5pc above its pre-crisis peak, while here in the UK we are still 3.8pc below it."

He believes that the strength in the Germany economy comes not just from its export base, and from being out of the financial sector, but also from structural differences such as the German Mittlestand – the family-owned businesses which make up the backbone of their economy: "They look to pass on their businesses to the next generation, rather than to sell them on as is so often the case in the UK."

His views were extremely controversial, but many agreed that engineers and ‘productive' workers were generally treated better in Germany, which helped the long-term strength of the economy. Sevendeuce says:  "People don't want to do engineering, science and technology in the UK because they can see the lousy prospects, indifferent money and gross insecurity of such careers. Of course bright young people will prefer medicine, law and banking. All areas where they can earn many times the income of an engineer, and enjoy high levels of security… even if they are not very good."

In the UK's most recent economic statistics, the real weakness was business investment, which fell by £1.7bn, a drop of 5.6% from the previous quarter, and 0.6% below its level for the same time twelve months previously. Manufacturing was down 0.8%.

This would seem to argue in favour of taking a look at the drivers of German investment strength. The CBI has called for the Government to ‘unlock' corporate balance sheets with business-friendly initiatives in the next budget. He talks largely in terms of tax cuts, but the German experience suggests that both sides may have to come up with more creative solutions to reprioritise the UK's corporate sector.

In its latest economic statistics, investments in Germany – particularly construction – remained robust. But it is too simplistic to suggest that Germany has got it completely right. The weakness in Germany came from exports and private consumption: "Exports in particular dropped 0.8% in the fourth quarter after growing 2.6% in the previous three months. Economists put this down to weaker demand in the Eurozone."

It was enough for economists to believe that Germany may dodge a recession, but it suggests that Europe's largest economy is being hurt by its position at the heart of the Eurozone. Its export sector has proved to be too focused on the Eurozone and has not been sufficiently adaptable in the face of weakness in the region. Consumer spending has seemed vulnerable and is likely to remain so while austerity measures are in place.

In the UK, in contrast, household consumption remained relatively robust, even in the face of continued austerity rising 0.5%. Exports registered a 2.3% rise, suggesting this part of the UK economy is not suffering significantly from the weakness in the Eurozone. In fact, the statistics here showed that the UK had been successful in re-orientating its export-base outside the Eurozone.

Both economies have strengths and weakness. The German economy has undoubtedly proved more robust over the long-term, but the UK's reliance on the financial sector accounts for much of this relative strength. The latest statistics show that UK corporate investment needs a shot in the arm and Osborne will have to use his imagination for the next budget, but the UK is doing some things right.  

 

More from Mindful Money:

Has the crisis caught up with Germany?

How do Germany's and the UK's economies compare?

New Europe: What are the core nations?

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