Analysis: The sick man and the dragon

As Barack Obama became president this week — amidst all the hope, hoopla and history — you may have missed the fact that desperate things were, once again, happening far outside the Beltway.

An especially ominous sign has been the sudden collapse of the German and Chinese economies, two powerful export engines that had been relative bright spots in a darkening world.

No more.

We learned this week that the German economy, Europe’s largest, could shrink 2.5 percent in 2009, which would be its worst performance since World War II. Meanwhile, China’s gross domestic product slowed to 6.8 percent, down from 9 percent in the previous quarter and half its pace in 2007.

Both economies have been hit by the slowdown in global demand. Some 50 percent of German GDP, after all, comes from exporting stuff to other places. China’s economy, too, has been fueled by myriad factories churning out everything from auto parts to plastic dolls, though China has also suffered from a bubble-popping collapse in housing construction.

So what happens when two key economic engines flame out? Bad things, of course.

Prime Minister Wen Jiabao said this week the outlook in China is "very grim," as thousands of factories shutter amid the weakness. Those are weighty words in a country that needs strong growth to absorb the millions of migrant workers flowing like troubled waters from poor rural areas to its teeming cities. That unease helps explain Beijing’s $586 billion economic stimulus package rushed out in November.

In Germany, meanwhile, banks are losing billions, January unemployment rose for the first time in three years and on Jan. 12 a nervous government quickly cobbled together a $67 billion package of tax cuts and government spending to goose the economy.

So fret, if you must. You will be forgiven. But a closer look reveals a surprise: a sense of German optimism. And no, that is not a typo.

In a dour country where “a” is for angst, black is a primary color and pessimism rivals soccer as the national sport, the shock is that Germany hasn’t yet fallen off the economic cliff.

“Usually the mood in Germany is worse than reality,” says Thomas Kleine-Brockhoff of the German Marshall Fund in Washington, D.C. “The surprising thing is that the German economy has been holding on for so long. This is a very good thing."

For that you can thank the hearty and still relatively happy German people. In stark contrast to the U.S., German consumer spending actually rose in December, with retailers reporting an abundance of optimism during the holiday season. German research firm GfK predicts consumer spending will remain stable throughout 2009.

To understand this seemingly strange twist, Kleine-Brockhoff points to the country’s recent history.

Germany, he argues, has gone through a “second economic miracle” thanks to economic reforms enacted throughout the 1990s and sharp, technology-driven productivity gains at German companies. After the intense strain of reunification, German political and business leaders finally got serious about healing the “sick man of Europe,” and did.

As a result German consumers grew happy, and remain so even today. So they’ve been spending their euros, a happy trend that — until now, at least — has helped offset a drop in exports.

Of course, the negativity is likely to return to Germany at some point. No matter where you live consumer psychology is a fragile thing, especially in the face of repeatedly dire news.

Even so, Germany has a lot going for it beyond a reformed economy and more productive companies. Unlike the U.S., Spain and Ireland, there is no serious housing bubble. Germany has a high savings rate, which cushions consumers in a downturn. Its banks, while weakened, still have capital to lend. Berlin has not dug itself into a huge spending hole. Longer term, there’s the country’s excellent education system and a strong spirit of entrepreneurship. Moreover, Germany has flexible political and economic institutions, and is still the unquestioned economic leader of the EU, the world’s biggest market.

All of these things should eventually help Germany emerge as a key linchpin of the global economic recovery.

So let’s all take a deep breath and step back from the bad economic news drip, drip, dripping out like Chinese water torture. Then maybe, just maybe, like our German friends we can say auf wiedersehen to the angst.

At least for the weekend.