http://www.nytimes.com/2001/08/08/business/worldbusiness/08MARK.html?ex=997934400&en=6f19cd011ed5bae0&ei=5040&partner=MOREOVER

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August 8, 2001

Sluggish Germany Begins to Drag Down Rest of Europe

By EDMUND L. ANDREWS

FRANKFURT, Aug. 7 — Germany, Europe's biggest economy, provided more evidence today that its growth has come to a stop and that it is dragging down the rest of the Continent.

The government reported today that industrial production declined slightly in June, adding up to a decline of about 2.3 percent in the second quarter. The unemployment rate climbed in July for the seventh consecutive month, to 9.2 percent from 8.9 percent in June.

The new data, though not as bad as many economists had expected, nevertheless provoked new unease across Europe. The euro, which had been gaining value against the dollar in recent weeks, dropped sharply, though it regained some ground later in the day.

Most economists now predict that Germany's economy will grow only about 1 percent this year, probably the weakest performance of any country in the European Union. Many also think the economy may already have contracted in the second quarter, and say it will be lucky to expand at all in the third. Because Germany accounts for one-third of total output in the 12 nations adopting the euro currency, its problems mean trouble for its neighbors. They also mean that Europe is in no position to replace the United States as a locomotive for world growth.

German political leaders and many economists have blamed the slowdown emanating from the United States for most of Germany's problems. Germany depends more on exports than most countries, particularly sales of the kinds of heavy equipment that companies stop buying in slowdowns.

But a growing body of evidence suggests that many of Germany's problems begin right at home. Notably the country's exports are still growing, in part because of a cost advantage derived from the euro's weakness.

Indeed, German exports are in many ways the brightest part of the economy right now.

BMW, the maker of luxury sedans and sports cars, said today that its profit doubled in the first half of 2001, as sales in the United States surged 21 percent. The Mercedes unit of DaimlerChrysler (news/quote) and Volkswagen (news/quote) have also enjoyed rising sales in the United States, while total American car sales fell by about 5 percent.

Yet here in the home market, car sales have declined sharply the last year, especially for midpriced cars, in part because of higher fuel prices and fuel taxes. Luxury models eked out only modest gains.

The chemical conglomerate, BASF, reported today that its operating profit shrank 15 percent in the second quarter, and that it would eliminate another 1,200 jobs around the world on top of the 3,000 jobs it had already planned to cut. BASF's biggest decline in sales was in Europe, and Germany in particular; North American sales fell 5.2 percent and in Asia and Latin America, sales rose.

"Currently, we have only one advantage, which is the weak euro," said Stefan Bielmeyer, an economist at Deutsche Bank (news/quote) in Frankfurt. "You can see the result in exports, which are very healthy. It is not exports that are hurting G.D.P."

So what is really ailing Germany's biggest economy?

Part of the problem is that exports are not providing as much growth as people had been expecting a year ago. But perhaps more important, the domestic economy never really achieved much dynamism when times were relatively good last year. Germany's growth reached 3 percent last year, slightly below the European average of 3.4 percent but much higher than in any other year since the euphoria after the fall of the Berlin Wall.

But even in a good year, consumers remained cautious. Though the government passed important tax cuts that took effect in January, they were soon offset by rising energy prices. The falling euro made imported goods — including oil — more expensive. And gasoline taxes were raised. All in all, consumers wound up with little if any extra money to spend, and new reasons to worry about their financial security.

"I am not surprised that Germany has been hit harder than other countries," said Gustav Horn, head of macroeconomic research at the Deutsche Institut für Wirtschaft in Berlin. "But I was surprised by the slack this year. What we underestimated was the effect of the oil price shock and the price increases in food. This resulted in an accelation in inflation, which had effects on personal consumption."

Many economists still think that German consumers will perk up later this year, now that inflation seems to be subsiding. But German industry is pulling back sharply. On Monday, the German government reported a steep decline in orders for manufactured goods in June, especially for machinery, equipment and other capital goods.

But the big surprise was that foreign orders declined slightly, by 0.4 percent, while domestic orders plunged 4.5 percent. In capital goods, the contrast was even starker: foreign orders were up 1.9 percent, domestic orders were down 8.5 percent.

Separating the American slowdown from the problems in Germany's backyard is not easy because a big part of German manufacturers' retrenchment reflects fears about events overseas.

"Both influences are important," said Willi Leibfritz, chief forecaster at the IFO economic research institute in Munich. "We have seen in the first half of this year a slowdown in foreign demand, but domestic demand has also been weak."

But Jean-Marie Mercier, an economist at Schroeder Salomon Smith Barney in London, said Germany might have already slipped into a recession. "The impact from the global demand slowdown has fed through very quickly to domestic confidence and domestic demand, and that is where you had the German surprises," he said.

-- (M@rket.trends), August 08, 2001

Answers

is the party,over yet???????????

-- al-d. (dogs@zianet.com), August 08, 2001.

I was in Germany last summer for a bit, and I could swear they were in a recession then. Jobs were precious commodities, everyone was always looking to save a few 'Marks. I felt rich there, and I felt a little lucky after I came home.

Very friendly, well educated, fun country, though.

-- Bemused (and_amazed@you.people), August 09, 2001.