Demand patterns in France, Germany and Belgium: Can We Explain the Differences?

Since the mid-nineties, the French and German domestic and external demand have shown dissimilar patterns. Although strongly integrated with the German economy, Belgium has evolved much more like France. During the pre-crisis period, private consumption and non-residential business investment were increasing at a steady pace in France and Belgium, while growth in domestic demand was much more subdued in Germany. In contrast, exports grew much faster in Germany than in its two Western neighbors. German exports recovered very strongly following the sharp contraction in 2009, while they grew at a much slower pace in France and Belgium. By contrast, the gap in domestic demand between Germany on the one hand, and France and Belgium on the other, is narrowing as a result of the crisis.In this paper we examine demand patterns since the mid-1990s in the three countries.We estimate error correction models for each country and each demand component. We inspect the contributions from fundamentals to each demand component and check on the equality of the long-term elasticities across countries. We also use the results from the dynamic equation to explain temporary deviations of private consumption and non-residential private investment from long-term fundamentals, with a particular focus on the role played by confidence and uncertainty.We find that, first, dynamics for private consumption, non-residential business investment, and exports since 2008 is dominated by conventional determinants, with no discernible structural break as a result of the crisis. Second, although country-specific factors matter in some cases, demand patterns in these countries are largely driven by common determinants. Third, developments in common fundamentals tend to dominate demand dynamics, coupled, in a few cases, with structurally different elasticities across countries. Fourth, short-term analysis suggests a role for confidence and uncertainty factors in explaining temporary deviations of these variables from long-term fundamentals.