December 4, 2022

Europe’s Economic Powerhouse Drifts East

With large parts of Europe still in an economic rut and struggling to cope with a debt crisis, Germany is increasingly deploying its money and energy outside the euro zone to fuel its robust growth.

The shift in focus, while still in its early stages, could have profound economic and political implications because it comes at a critical time when the rest of Europe is counting on Germany to continue its traditional role as the locomotive of the Continent’s economy.

German companies, instead of concentrating their investment overwhelmingly on countries like France and Italy, are sending a growing proportion of their euros to places like Poland, Russia, Brazil and especially China, which is already the largest market for Volkswagen and could soon be for Mercedes and BMW.

The German government is following suit, committing more diplomatic resources to its growing trade partners, particularly China, whose prime minister, Wen Jiabao, brought an entourage of 13 ministers and 300 managers when he visited Chancellor Angela Merkel of Germany last month.

President Dmitri A. Medvedev of Russia brought a similar entourage with him Monday to Hanover for annual German-Russian consultations, including Alexander Medvedev, deputy chief executive of Gazprom.

The economic shift is already having profound consequences inside Europe. As Germany becomes less dependent on euro zone markets, there are signs that it is becoming stricter with its ailing partners, like Greece, Italy and Portugal, adding to the pressures already straining European unity.

“It reinforces a shift that we have seen in recent years for Germany to become rather more focused on its own national interests rather than sacrificing for some defined European interest,” said Kevin Featherstone, an expert on E.U. politics at the London School of Economics. “Germany is not giving up on Europe, but it is certainly frustrated.”

German politics are in line with the interests of German businesses like Fresenius, a health care company in Bad Homburg, near Frankfurt. Last year, Fresenius recorded a sales increase in Asia of 20 percent, to €1.3 billion, or $1.8 billion. That compared with its sales in Europe of €6.5 billion, up 8 percent.

Fresenius’s chief executive, Mark Schneider, said he expected the trend to continue, noting that China was trying to create a universal health care system that would ensure its people access to kidney dialysis and infusion therapies — the sort of products that Fresenius provides.

Germany, of course, remains deeply entwined with the euro zone, which is still its largest source of trade by far. But Western Europe’s share in the German pie is shrinking as companies focus new investment on more vibrant markets.

“I’m not sure I would call Germany the locomotive” for Europe anymore, said Marc Lhermitte, a partner at the consulting firm Ernst Young. “It’s an engine.”

Mr. Lhermitte was one of the directors of a study in May by the firm that looked at trends in cross-border investment around the world.

Last year, the euro area’s share of German exports fell to 41 percent from 43 percent in 2008, while Asia’s share rose to 16 percent from 12 percent, according to Bundesbank figures. During the same period, exports to Asia rose by €28 billion, while exports to the euro area fell by the same amount.

Fresenius is one of many companies that reflect the trend. Corporate investment in Western Europe is still rising in absolute terms, said Mr. Schneider, but “capital spending and employment is not rising as much as we are seeing in emerging markets.”

There are also signs that Germany’s prosperity is no longer helping the rest of Europe the way it did a few years ago. On the contrary, the rest of Europe, particularly its southern half, is falling further behind as the European Union struggles to deal with the sovereign debt crisis.

The Italian economy, for example, is no longer cruising in Germany’s slipsteam.

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U.S. Economic Growth Slows to 1.8% Rate in Quarter

Total output grew at an annual pace of 1.8 percent from January through March, the Commerce Department said Thursday, after having expanded at an annual rate of 3.1 percent in the fourth quarter of 2010.

When the year first began, economists had been expecting a much more robust growth rate of about 4 percent, only to be barraged by bad report after bad report as the days wore on. Turmoil in the Middle East set off a jump in oil prices. Winter blizzards shuttered businesses and delayed construction, causing investments in nonresidential structures like office buildings to fall by 21.7 percent compared with an increase of 7.6 percent at the end of 2010. Imports, which are subtracted from output, surged, and military spending sank.

Still, economists expect many of these problems to fade later in the year. Last quarter’s dismal news was, hopefully, “a pause, not a trend,” said Kathy Bostjancic, director for macroeconomic analysis at the Conference Board.

Of these various economic menaces, the most enduring is probably higher commodity prices, which reduce the amount of pocket money that households and businesses have available to spend on other purchases and, in the case of companies, hires. Gasoline prices have shown little sign of falling in recent weeks, and have nearly neutralized the 2011 payroll tax cuts that were intended as a stimulus.

“Consumers are spending more, but it’s getting soaked up in higher gas prices and higher food prices,” the chief economist at RDQ Economics, John Ryding, said. “That’s not leaving nearly as much left over for discretionary spending.”

Declines in government spending will continue to drag on the economy throughout the year, as strapped state and local governments cut back and the federal government tries to cut down on nonmilitary spending. Last quarter’s steep drop in military spending, which tends to be volatile, will probably reverse itself later in the year, economists said.

Wall Street had little reaction to the report, with markets mixed.

The main sources of strength last quarter were an increase of inventories on stockroom shelves and higher business spending on equipment and software. Equipment and software purchases have grown for eight consecutive quarters, and have only recently been accompanied by strong hiring.

At an unprecedented news conference on Wednesday, the Federal Reserve chairman, Ben S. Bernanke, addressed concerns about sluggish growth so far this year.

 “Most of the slowdown in the first quarter is viewed by the committee as being transitory,” Mr. Bernanke said, referring to the opinions of the Fed’s Federal Open Market Committee, which sets interest rates. “That being said, we’ve taken our forecast down just a bit, taking into account factors like weaker construction and possibly just a bit less momentum in the economy.”

 Other economic reports in recent weeks have been relatively optimistic, including industrial production, corporate earnings and — finally — job growth. The nation’s employers added 216,000 jobs in March, the fastest growth since last spring when the federal government temporarily increased hiring for the decennial census. The job growth last quarter was spread throughout almost every sector.

“The broad set of labor market indicators still look good,” said Andrew Tilton, a senior economist at Goldman Sachs, which is forecasting that the economy will accelerate and expand at a 4 percent annual rate in the second quarter.

 Still, given the ground lost during the Great Recession, the economy has a long way to go before its job market and output are back on track and feeling healthy again. There are some fears that the slow growth in the first quarter may weigh on job growth going forward, since employment trends tend to lag what happens in the rest of the economy.

“Payroll growth may have a temporary wobble,” said Ian Shepherdson, chief United States economist at High Frequency Economics. “This is not a fundamental shift in the path of recovery, but maybe a temporary distortion.”

Economists also played down the economic threat to the United States posed by Japan’s deadly earthquake and tsunami in March.

“It only happened at the very end of the quarter, and any disruptions to supply chains would take a few weeks to come through,” said Paul Dales, a senior United States economist at Capital Economics. “If there’s any effect it’ll happen in the second quarter, but the impact should be minimal.”

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