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Wednesday May 9, 06:04 PM

Germany economy suffers output warning

By Clifford Coonan

BERLIN (Reuters) - German industrial output tumbled 3.7 percent in March, data has showed, provoking some analysts to join a Bundesbank member in warning that Europe's largest economy might be about to go into recession.

The sharp month-on-month fall followed a 0.6 percent rise in February and compared with a Reuters survey of economists suggesting a monthly fall of 1.3 percent after a 4.4 percent decline in manufacturing orders announced earlier this week.

"We have already been telling clients for some time that Germany is likely to have a recession this year and (the data) would tend to confirm that," said Gabriel Stein of Lombard Street Research in London.

"It should not come as a surprise," Stein said, citing Monday's plunge in manufacturing orders and recent data from the German Ifo business sentiment survey.

The data slapped the euro down to 88.12 cents, its lowest level since April 19, and bonds rallied as dealers fretted over the outlook for the eurozone economy. Two year German bond yields fell by almost three basis points to 4.405 percent, down 5.7 basis points on the day, although the currency later pared losses to around 88.30 cents.

Speaking before the data was made public, Klaus-Dieter Kuehbacher, head of the regional central bank for Berlin and Brandenburg, also said a recession was possible.

"We have to be worried we are entering a recessionary phase," Kuehbacher said.

TWO PERCENT GROWTH GOAL ALREADY SEEN AS OPTIMISTIC

Against the background of weaker global growth, the Germany government recently cut its official growth forecast for 2001 to around two percent from 2.75 percent.

German Chancellor Gerhard Schroeder admitted the data was disappointing but dismissed talk of recession.

"I don't think that this danger exists," Schroeder told reporters, noting economic growth in 2001 was expected to be "substantially above" its average level of the 1990s.

"What we are now seeing has to do with Germany's export dependency on one country - that is the United States," Schroeder added.

But analysts said the data made even the government's latest projection look optimistic.

"It looks like German GDP will have grown by only a half percent at best in the first quarter and will be extremely weak in the second, perhaps even negative. So forecasts for German GDP growth of two percent in 2001 look extremely optimistic on the basis of today's numbers," said Julian Callow of CFSB in London.

"I don't think we can talk about a recession in the manufacturing sector but it is clear that it is losing momentum," said Alexander Boeter of Deutsche Bank in Frankfurt.

"The outlook for German GDP this year will depend on how much momentum there will be in the second half.

"Our forecast of 1.8 percent growth is already quite cautious and after those data, we probably won't get more than that and there is a risk that (the growth forecast) may have to be revised down," he said.

CONSTRUCTION SECTOR "COLLAPSE"

In a statement, the German finance ministry said economic weakness was now clearly having an impact on industrial production.

"The construction industry, which has had strongly deviating figures in recent months, suffered a real collapse in March with a decline of 13.6 percent," the ministry said.

Manufacturing production was down 3.0 percent, while capital goods output was down 2.6 percent. A Reuters calculation showed a three-month moving trend rate of production was still higher in March than in February.

The ministry noted that bad weather in March played a role and said it expected the output figures to be subject to a "noticeable upwards revision".

Revisions by the Bundesbank are common. In January, the central bank revised an initially reported 0.9 percent decline in industrial output for November to a gain of 0.9 percent.

-- (M@rket.trends), May 10, 2001

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European Central Bank cuts rates in shock about-face

-- (M@rket.trends), May 11, 2001.