Germany facing recession

Michael Glackin Business Editor

FEARS of a European recession deepened yesterday, as Germany, which accounts for more than a third of the eurozone economy, suffered another sharp slump in business confidence.

Germany’s closely-watched Ifo business climate index fell to its lowest level in more than two years, plummeting from 92.5 points in April to 90.9 points in May, a long way down from its level of 101.3 for the same period last year.

The plunge is the index’s fourth decline in successive months and is well below economists’ predictions of a fall to 91.7 points.

The German government has already been forced to revise growth estimates this year from 2.6 per cent to just two per cent, but a raft of recent economic data has made a number of the country’s leading think-tanks to downwardly revise estimates further still.

Bundesbank council member, Hans-Helmut Kotz, said: "We can’t rule out the risk of a recession...we think 1.5 per cent growth is very ambitious and rather implausible."

He added the US was "relatively close" to a recession, which would in turn further exacerbate Europe’s crisis because of Germany ’s high exports to the US.

Ifo chief economist Gernot Nerb said the accelerating slump was worrying, and added it was "not a good signal for a recovery around the corner".

The news immediately put the euro under pressure, which fell a quarter of a cent against the dollar to 0.8516 cents before recovering slightly.

The German Dax, also suffered, falling 39.15 points to 5887.23, against the rising trend of the FTSE 100 and the French CAC40 which both finished the day higher.

Earlier this week German economic minister Werner Mueller warned that the country’s second quarter growth may have slipped to zero. HSBC European economist Robert Prior-Wandesforde said: "There is no doubt that Europe is going into a manufacturing recession.

"Germany is set for a second quarter of GDP contraction [the technical measure of recession] and the latest figures underline that Germany is no longer the powerhouse of the European economy."

He added: "It remains the largest economy, but its recent growth has been below the rest of euroland. While Germany has been averaging around 1.7 per cent growth, the rest of euroland has been around 2.7 per cent."

Prior-Wandesforde said Germany’s problems stemmed in part from the structural problems caused by unification with the former East Germany.

"The increase in wage growth in the east which unification brought has not been offset by economic growth, and the German economy is now uncompetitive. Job growth is also lower in Germany than other parts of Europe."

The news will increase pressure on the European Central Bank to cut interest rates, despite its adherence to fighting inflation which is currently running at an eight-year high of 3.4 per cent. Critics of the bank - most vocally Germany - have argued that a rate cut is needed immediately to kick-start growth within the eurozone.

http://www.thescotsman.co.uk/index.cfm?id=83926

-- Martin Thompson (mthom1927@aol.com), June 23, 2001

Answers

Isn't Germany the main contributor of European growth? If this be the case, woe un to be Europe.

-- QMan (qman@c-zone.net), June 23, 2001.

When Germany feels the chill so do we all

Knock-on effect for the euro

Saturday June 23, 2001 The Guardian

Yesterday's business confidence figures from Germany were very worrying - not least for Wim Duisenberg and his colleagues at the European Central Bank. It is not simply a question of whether Germany is teetering on the brink ofrecession, though the signs do not look exactly healthy. It is the knock-on effect on the rest of the euro area and on the euro. Germany is the single currency area's biggest economy. As Germany slows it will inevitably act as a drag on the rest of the eurozone - and on others as well.

One of the hopes of those praying for a rally in the euro was the prospect of eurozone growth outstripping that of the US economy. In such circumstances eurozone assets would become more attractive than dollar denominated ones, prompting a shift in investment flows which would benefit the beleaguered single currency.

The evidence, from both sides of the Atlantic, is far from clear but it is no longer a racing certainty that the eurozone will be able to show the US a clean pair of heels in the growth stakes.

At the very least that will give pause to those who might have thought of switching out of the US into Europe. Given the slide in its value since its launch two-and-half years ago, the euro is scarcely in a position to challenge the dollar's safe haven status.

There is a psychological aspect too. The euro was designed as a surrogate German mark in order to give it some thing of the aura enjoyed by the German currency, the anchor of the old exchange rate mechanism.

That, however, has helped create a situation where international investors looking for a health check on the euro simply look at the performance of the German economy. The picture emerging from Brandenburg to Bavaria is not one to encourage any enthusiasm for the euro.

So where does that leave the ECB? It could cut interest rates which might help growth. But such a move is already priced into the market. After that there is not much left than fervent prayer.

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-- Martin Thompson (mthom1927@aol.com), June 23, 2001.

IIRC, Germany is the world's third-largest economy, after the U.S. and Japan; and is by far the biggest in the Eurozone, as the article above notes.

-- Andre Weltman (aweltman@state.pa.us), June 25, 2001.