Germany's Export Reliance Edges Out European Neighbors

By relying on exports and not promoting domestic demand, Germany is creating a lopsided recovery that is hurting retailers and foreign exporters.

While Germany's exports continue to surge, its consumers are refusing to spend. The government has failed to raise wages or encourage consumption and says it has few plans to do so.

"By cutting its budget deficit and resisting a rise in wages to compensate for a decline in the purchasing power of the euro, Germany is actually making it more difficult for other countries to regain competitiveness," billionaire investor and cofounder of the Quantum Fund George Soros said in a speech on June 23 in Berlin. Germany is "the main protagonist" for Europe's debt crisis, he added.

Germany's economy - four times more reliant on exports than is the United States - posted the highest second-quarter growth in the Eurozone, growing by 2.2% in the second quarter from the first. The country is headed for about 9% growth this year.

Foreign sales accounted for 41% of German gross domestic product (GDP) in 2009, much higher than Japan's 13% and 11% in the United States. Foreign sales are slated to expand 11% this year and 8% in 2011, outpacing world trade.

According to the International Monetary Fund, Germany will have an account surplus of 5.5% of GDP this year, close to China's 6.2%.

"Anybody who believes China is a problem has to believe Germany is a problem," Nobel Prize-winning economist Joseph Stiglitz told Bloomberg in an Aug. 5 interview.

German Chancellor Angela Merkel has defended Germany's trade surplus as a sign of a booming economy with quality manufacturing.

"We won't surrender our strengths just because our exports are perhaps purchased more than those of other countries," she said to parliament in March. "That would be the wrong European answer to the competitiveness of our continent."

Merkel appears to have no plans to increase German consumers' buying power, as shown with her planned $103 billion (80 billion euros) austerity measures.

Still, experts say German growth will not be maintained as global demand slacks and the need for German goods is trimmed.

"Germany has got to work on its domestic demand," Andrew Bosomworth, head of portfolio management at Pimco, told Bloomberg.

Germany's pension system also is feeling strain as the number of people receiving pensions rose to 17.5 million in 2009 and duration of payments time doubled from 1960. This decreases the chance the government will impose income-tax cuts to encourage spending.

As long as income remains low, so will consumption - something many Germans are okay with.

"We were successful in building one of the most competitive economies in the world, why should we ruin that by pumping up wages now?" said Thomas Mayer, chief economist at Deutsche Bank AG (NYSE: DB). "That would increase unemployment. And we shouldn't punish our exporters, that's idiotic, they're our crown jewels."

German Retailers Suffer

With a German economic recovery based on overseas consumer spending, local retailers are having trouble selling to at-home customers.

"We're like the Japanese, we like quality, we buy one good knife," said Thomas Kemmsies, head of fixed income at Nomura Asset Management in Frankfurt. "It's also not in the German DNA to go out and borrow to consume."

A survey by research firm GFK earlier this year showed Germans are saving, with almost 50% of Germans spending less on food and drink than years past and 40% holding off on big automobile and appliance purchases.

The drive in German exports is widening the gap between Germany's retail sector performance and the benchmark DAX share index. The DAX has gained 4.2% this year, while German's largest retailers keep falling.

Germany's largest retailer Metro AG (ETR: MEO) has slipped 3% this year, home-improvement giant Praktiker Bau und Heimwerkermaerkte Holding AG (ETR: PRA) is down 19% and skincare producer Beiersdorf AG (ETR: BEI) has lost 5%.

Praktiker said it has reduced the number of promotions it will have in German shops for the remainder of the year and will restructure to focus on operations in more profitable markets abroad.

"German retailers are no investment story for me," Stephan Thomas, fund manager at Frankfurt Trust Investment GmbH, told Bloomberg. "Exporting companies in general are a good investment to play the German economy though."

German luxury carmakers meanwhile have enjoyed robust sales increases based on foreign demand. Sales of Mercedes cars to China were up 120% in the first six months of the year from 2009, and sales to Brazil, India and Russia were up 70% - 80%. Chinese demand also boosted sales for Volkswagen AG (PINK ADR: VLKAY).

Lanxess AG (ETR: LXS), Germany's largest publicly traded specialty chemicals maker, raised its earnings target Aug. 6. based on increased foreign demand, seeing strong growth from India and China.

Electronics and engineering leader Siemens AG (NYSE ADR: SI) also has raised its 2010 outlook based on increasing exports and is ramping up worker hours after cutting down in 2009.

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