Despite 3 Percent Growth, Is Recession One Quarter Away in Germany?

One would think a three percent annual growth is no shabby showing on any developed economy. Yet markets are awash with concern today that Germany--also known as the rich uncle in a fiscally challenged European family--exhibited deflated growth for 2011.

That that three percent is twice what the US and the Eurozone saw, or that it is down less than a fifth on last years record growth of 3.7 percent (highest since 1990) is no consolations for the bears. Fear exists that the Eurozone's largest economy is finally catching up to the down trajectory of the rest of its cohorts.

Such fears aren't the product of greedy spectators searching for the coal lining in everything. That three strong quarters were followed by a fourth one that saw a quarter of a percent contraction may well mean an inflection point for Germany.

The culprit is clearly the heavily export-laden economy. 28 percent of Germany's GDP is earned by trading with its EU neighbors and Switzerland, and Euro zone nations aren't buying as much as they used to these days. By comparison, only 2.5 percent of its GDP is achieved by trading with China, a major growth market for exporters the world over. The UK and the US are both slightly higher within German exports (the two accounted for roughly 50 percent more than China as of 2009).

Germany won't decouple its economy from the rest of the world anytime soon. But all is not bad on any report that contains a three percent uptick in its headline. Unlike the demand in the Euro zone, domestic demand was a main contributors to GDP growth last year, being up 2.1 percent this year. Other growing GDP contributors were private consumption (+1.5%), government spending (+1.2%) and investment in plant and machinery (8.3 percent).

Record lows in unemployment are fueling both demand and job creation and, coupled with record low borrowing rates, have some analysts expecting that a rebound will be swift. A swift rebound, however, would require a let-up in tensions from within the Euro zone, and reality may prove to be less forgiving. Thus, forecasts have been adjusted to around half a percent growth for 2012 and just under two percent for 2013.

Annual numbers like these do not preclude the odd negative quarter in between, which would stifle confidence and become a self-fulfilling prophecy in the process. As two consecutive negative quarters make a recession, the importance of headline numbers goes beyond simple PR for Germany, as it strives to become a growth engine for a zone it is trying to keep united, and from whose unity and collapsed fiscal barriers it has a lot to gain.