Why Are Germany and Japan Beating the Recession?

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Stefan Theil

What happened to the idea that the U.S.—thanks to massive and early stimulus, radical financial-sector restructuring, and the innate flexibility of the American economy—would recover from the global recession before Europe, and certainly before Japan, the perpetual sick man of Asia?

This week, unexpected OECD data showed Japan growing 0.9 percent in the second quarter. That's on top of the surprise news last week (PDF) that Germany and France each grew 0.3 percent from April to June, after the consensus predicted another contraction. That means three of the G7 economies are now officially out of recession, while three are still in it (the U.S. at minus 0.3 percent in the second quarter, Italy at minus 0.6 percent, and Britain at minus 0.8 percent). Canada, the other G7 member, has yet to report Q2 data.

France and Germany rebounded on the back of rising exports, mainly to Asia where China is growing at a clip of 8 percent a year. Europe's two biggest economies have also been helped by solidly stable consumer spending throughout the entire downturn. Consumers and homeowners never racked up U.S.-style debt, so they've not had to suddenly get frugal. Nor did their home values implode, so French and Germans don't suddenly feel poorer. Just as important, says Deutsche Bank economist Gilles Moec, Europe's much-derided worker protections have acted as a buffer by putting a brake on layoffs thus slowing the rise in unemployment, another powerful determinant of consumer spending (and thus economic activity). If Europe is lucky and the world economy picks up further, some of those pent-up layoffs may never happen.

Much of Japan's surprise growth seems to be the result of government stimulus, which will peter out in the coming quarters. Moec suspects most analysts won't make much of Japan's figures quite yet. Of all the advanced economies, he says, Japan's data tend to be all over the place and one quarter's growth could be a fluke to be adjusted later.

The upticks still leave the economies of Japan and Germany much deeper in negative territory (minus 6.5 percent and minus 5.9 percent year-on-year, respectively) than the U.S. (minus 3.9 percent). Only France has gotten off comparatively lightly at minus 2.6 percent.

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