The past years witnessed rapid changes in the patterns of macroeconomic development in Europe. Most European countries have managed to preserve their macroeconomic position despite the dramatic financial difficulties facing the developed world. At the same time, as the balance of macroeconomic forces changes globally, Europe must be ready to readjust its macroeconomic decisions to meet the emerging fiscal, monetary, and trade needs.
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IHS Global Insight (2014) provides a brief but detailed overview of German macroeconomics. Germany is claimed to be one of the key economic players in Europe. The purpose of this report is to summarize the current state of macroeconomics in Germany and evaluate its implications for future development.
Summary of the Article
IHS Global Insight (2014) has conducted a detailed review of the macroeconomic affairs in Germany. The key message sent by IHS Global Insight (2014) is that Germany has everything needed to pursue further economic growth, but the risks of crisis in the Eurozone should not be disregarded. In terms of GDP, investment and private consumption will remain its principal components (IHS Global Insight, 2014). Exports will be problematic due to the Eurozone crisis mentioned above.
Germany can expect its annual GDP growth to reach 1.5 percent, although demographic factors will slow down GDP growth in the long run (IHS Global Insight, 2014). In terms of consumer demand, the discussed Eurozone crisis may have negative impacts on buoyancy; still, Germany can expect its incomes, employment, and wages to grow in the short-term perspective. These income developments will open new opportunities for retailers (IHS Global Insight, 2014).
The inflation prospects facing Germany are quite optimistic. IHS Global Insight (2014) suggests that, until the beginning of 2015, the rates of headline inflation will not exceed 2 percent. Underlying inflation in the medium- and long-term perspectives will also remain within reasonable limits. These prospects will predetermine the direction of the country’s fiscal and monetary policies.
According to IHS Global Insight (2014), despite the economic problems Germany experienced in 2012, its public image in fiscal and monetary policymaking remains attractive. In September 2013, a new government coalition was created to implement an expansionary fiscal policy and provide continued support to public finances (IHS Global Insight, 2014).
As for the German monetary system, its targets are set by the European Central Bank, and the euro remains one of the most convertible international currencies (IHS Global Insight, 2014). Germany expects its prices to be relatively stable, and the negative consequences of the European and global financial crises for Germany are likely to be minimal (IHS Global Insight, 2014).
External trade is still one of the key macroeconomic sectors in Germany. IHS Global Insight (2014) describes Germany as the chief economic power in Europe. Fifty-nine percent of German exports are supplied to the countries of the Eurozone (IHS Global Insight, 2014). In the meantime, Germany keeps competing with its major rival, the United States, for the spheres of trade influence in Europe (IHS Global Insight, 2014). The situation with imports does not look as optimistic as it is with exports.
Since 2005, numerous weaknesses in domestic demand have hampered the implementation of effective imports initiatives. However, as consumer demand is recovering, the chances are high that more German firms will use imported materials to manufacture goods and develop new services (IHS Global Insight, 2014).
The Three General Economic Principles
Trade Can Make Everyone Better Off
As always, trade is one of the fundamental factors of continued macroeconomic growth in any economy. In the case of Germany, private consumption makes up the basis of the country’s GDP, and it comes as no surprise that Germany is interested in expanding its trade base (IHS Global Insight, 2014).
Trade expansion is a reliable symptom of stability and growth in German macroeconomics, although the risks of consumer uncertainty and low confidence in the wake of the major financial crises should not be disregarded. Trade can make everyone better off if Germany implements effective policies to motivate the exports of goods and services and, at the same time, support its consumers in their willingness to purchase domestically manufactured goods.
A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
The country’s standard of living and the success of its macroeconomic reforms depend greatly on its ability to produce goods and services. More specifically, the expansion of manufacturing and service industries in the domestic economy gives rise to employment and tax payments and, for these reasons, creates a climate of stability and growth. IHS Global Insight (2014) predicts that, through 2014, unemployment will gradually decline.
Certainly, many of these trends grow from the liberalization of the EU markets that leads to increased immigration (IHS Global Insight, 2014). At the same time, the growing share of private consumer spending in the German GDP is a wonderful opportunity to expand employment prospects and use its positive results to improve the standards of living in the country.
Consumer spending increased the production of goods and services, and improved employment opportunities will create a circle of interdependencies, guiding Germany towards better standards of living in the long run.
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Prices Rise When the Government Prints Too Much Money
The growing amount of money in the economy is directly associated with the risks of inflation. Apparently, Germany maintains a well-weighed view on its macroeconomics, leading an expansionary fiscal policy and keeping an optimal amount of money in the economy. The support of consumer spending and public finance are more important aspects of the macroeconomic agenda that increasing the sum of money or accumulating unnecessary debts.
According to IHS Global Insight (2014), Germany will still experience certain macroeconomic difficulties, but mostly due to the aging population and the growing uncertainty at a global scale. Structural improvements implemented by Germany in the last several years will create a strong foundation for its sustained growth in the long run (IHS Global Insight, 2014).
On Macroeconomic Indices
Employment (Labor Force)
When it comes to the labor force, one of the key macroeconomic indicators is the rate of unemployment. According to Mankiw (2008), “unemployment rates tell us the fraction of workers who are unemployed” (p. 16). IHS Global Insight (2014), reports that unemployment rates in Germany in the coming years will slowly decline, as the growing demand for consumer goods leads to a gradual labor market expansion.
In addition, the growing inflow of immigrants to Germany will help the country to meet the demand for the quality labor force, coupled with the strong policies aimed at supporting satisfactory minimum wages. What Germany should monitor is an aging population, as it will have inevitably negative impacts on the quality of its labor force.
Mankiw (2008) writes that gross domestic product is the best indicator of how well the economy functions. GDP can be viewed in two distinct ways. First, it can be treated as the sum of the incomes earned by all members of the economy (Mankiw, 2008). Second, it can be viewed as the sum of all expenditures related to the output of goods and services (Mankiw, 2008). IHS Global Insight (2014) considers the German GDP in terms of its separate components, such as consumer spending and investment.
As of today, it is consumer spending that drives gradual but tangible increases in the German GDP (IHS Global Insight, 2014). Investments also promise to support the German economy. At the same time, the country expects to increase its government expenditures, particularly in relation to pensions (IHS Global Insight, 2014). Also, the crisis of the Eurozone is likely to slow down the macroeconomic recovery in Germany.
Inflation (Monetary Policy)
The rates of inflation represent an important macroeconomic indicator, which measures the percentage change in prices compared with the year before (Mankiw, 2008). One of the greatest advantages of the German monetary policy is that it enables the government to keep inflation to a minimum. More specifically, the country does not expect the rates of inflation to exceed 2 percent until the end of 2015 (IHS Global Insight, 2014). The rates of underlying inflation will be even lower – between 1 and 1.5 percent (IHS Global Insight, 2014).
Certainly, the country cannot be absolutely confident that it will manage to keep inflation low in the long run, due to the existing demographic and structural problems. Simultaneously, the current fiscal and monetary policies hold a promise to create a picture of macroeconomic stability and secure the nation from serious inflationary shifts.
Evaluation of the Article
The article is actually an official report that provides an insight into the nature of the macroeconomic processes in Germany and their implications for the country’s economic future. The report provides a detailed statistical analysis of the recent macroeconomic data and offers a well-grounded idea of what it will be like to work and live in Germany in the next couple of years. Unfortunately, the resources used to generate conclusions and predictions are unknown.
Also, little explanation is provided in relation to the country’s monetary policy and its possible role in maintaining low rates of inflation in short- and long-term perspectives. The data provided in this report should be compared with the data provided in other reports in order to develop a more objective picture of the macroeconomic situation in Germany.
In conclusion, Germany exemplifies the promise of stability and macroeconomic growth in the nearest perspective. The data provided by IHS Global Insight (2014) offers an insight into the way Germany deals with its macroeconomic challenges. The rates of inflation are expected to be remarkably low, while the sum of money in the economy is likely to be optimal. The country’s GDP is defined primarily by the positive changes in consumer spending and investments.
Consumer demand keeps growing, creating favorable conditions for the subsequent expansion in trade and manufacturing. Unemployment declines, and structural changes facilitate the implementation of macroeconomic reforms.
Unfortunately, many macroeconomic difficulties continue to persist, including the aging population and the continued crisis in the Eurozone. The country’s monetary policy also demands a more comprehensive explanation. The data provided by IHS Global Insight (2014) should be compared with the data included in other reports, in order to create a more relevant picture of the German macroeconomic conditions.
IHS Global Insight. (2014). Germany: Country intelligence report. Englewood, CO: IHS Global Insight.
Mankiw, G. N. (2008). Macroeconomics. Boston: Cengage Learning.