Rising number of childbirths in Germany: A glimmer of hope for consumption

Whether a significant pick-up in consumer spending in Germany is in store over the coming year, will be of essential importance for this country’s and Europe’s growth prospects in 2008. As Sebastian Dullien correctly outlined in his post on November 9, 2007  (http://www.rgemonitor.com/euro-monitor/475/the_german_recovery_tripple_whammy_ahead_for_investment), the coming twelve months will not see an environment that is conducive to investment spending. I.e. the main engine of demand growth over the past two years is very likely to stall in the near future.   Yet despite the fact that actually all economic forecasts incorporate a significant pick-up of consumer spending in their baseline scenario (our own forecast of a below consensus estimate of 1.7% economic growth in 2008 is no exception in this respect), evidence to back this assessment up is currently in short supply. All that can be said is that the necessary conditions to propel consumer spending forward are currently in place: Job creation, while likely to slow somewhat, runs at more that 1.5% year-over-year and wage growth is a least strong enough to compensate for current inflation. However, evidence from consumer surveys – whether from GfK or the European Commission – add more than a pinch of caution to an optimistic outlook: Purchasing intentions are down to levels right after the VAT hike in January 2007, income expectations have weakened of late and last but not least “perceived inflation” (measured as the difference between consumer inflation expectations on the one hand and actual HICP rates on the other) is at historically high levels. Despite the need for caution when using (consumer) survey data in formulating forecasts, this definitely does not augur well for consumer spending growth.   Yet there is one encouraging piece of evidence to the positive that could be easily overlooked: For the first time since 1990 the number of childbirths seems to have risen again in 2007. The government was, of course, quick to attribute this to newly introduced family benefits. As I am no demographer by profession, I will refrain from judgement on this. What I can offer though, is a reference to some research I did some two years ago on savings behaviour and family structure. Using time series and panel data from the Sample Survey of Income and Expenditure (“Einkommens- und Verbrauchsstichprobe”), conducted every five years by the Federal Statistics Office, we found that the individual household savings rate was increasing to the tune of 0.5 percentage points for every additional 1.000 EUR of income. But at any given income, the household savings rate was 0.5 percentage points lower in the incident that (at least) one child was a household member than for families without children. Only as a technical amendment: Unfortunately, the data did not provide for the possibility to check for the influence on the savings rate induced by the exact number of children per household.   Additional evidence for the positive relationship between a rising number of childbirths in Germany and economic growth can also be found from longer-term time series analysis: Ever since the invention of the contraception pill, there are just two longer periods with a rising trend in childbirths: First from 1976 to 1980 and second from 1985 to 1990. Both were periods of stable and strong economic growth.   The relationship between both variables is not clear cut in terms of causality. For one, rearing children is quite naturally incurring additional costs. If these are not compensated, then aggregate consumption will rise and the savings rate decline. Second, the decision of having children is due to its long-term nature easier if beneficial economic conditions are expected to remain benign.   Bottom line: The rising number of children being born at the very least indicates that the economic optimism in Germany might be on the rise again. Even if the evidence for a revival of consumer expenditures from surveys remains mixed, child-related expenditures might help this recovery along.

2 Responses to "Rising number of childbirths in Germany: A glimmer of hope for consumption"

  1. Sebastian Dullien   December 28, 2007 at 5:41 am

    David, a very interesting post. Empirically from anecdotal micro-observation, it is quite plausible that the savings rate drops if children are born: First, income usually falls temporarily as one of the parents at least temporarily drops out of the labour market. Second, spending needs increase, the more if both parents continue to work as then they will need to pay for child care.This might also help to explain why French consumption has done so much better than German consumption over the past years (while of course, disposable income also plays a role).The question is whether the increase recorded in the number of child births in 2007 is enough to trigger a sizable change in aggregate consumption. The number of children born has increased by roughly one percent in 2007. In absolute terms this amounts to less than 7000 children. Even if all 7000 households concerned would cut their savings significantly by several percentage points, the overall impact for a nation with roughly 40 million households probably is very small.

  2. David F. Milleker   December 28, 2007 at 9:45 am

    Sebastian, Thanks for your comment. You are, of course, quite right that 7,000 additional children are not enough to budge aggregate consumption a lot. Nonetheless, every trend has to start somewhere. Between 1985 and 1990 the number of childbirths increased by some 25k every year. Given that you now have fewer females of childbearing age, I suppose that 10+ k kids per year are about as much as you can hope for. What my post is mostly about is that there might – hopefully – be a virtuous circle under way: economic stability begets more kids and more kids stabilising consumer spending. All the best, David