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Germany: A Weak Start--and No Pickup until Yearend

This time last year, Germany led the euro zone, growing more than a percentage point faster than the area's overall pace. U.S.-led global growth fueled its export machine, while low inflation and improving labor markets boosted consumer spending.

Now, all that has been turned on its head, and economists are yet again dialing down their 2001 growth forecasts, from about 2% into the 1.5% to 2% range, with little hope for a meaningful pickup until yearend.

The latest disappointment was first-quarter real gross domestic product, which grew 0.4% from the fourth quarter, when real GDP grew only 0.2% from the third quarter, the weakest showing in a year and a half. First-quarter GDP was much softer than it looked. A larger trade surplus contributed about a percentage point to overall growth, but that's because imports dropped sharply, reflecting weak domestic demand. Exports fell for the first time in two years, private consumption went nowhere for the third quarter in a row, and construction investment plunged.

Second-quarter GDP may be flat--or even down. Industrial production had been holding up on the strength of past orders, but March bookings fell off sharply, especially foreign orders. March output dove, and business sentiment continued to fall in April to a two-year low.

Consumer spending is getting hammered as higher prices for energy and food hurt household buying power at a time when job growth has come to a standstill. Preliminary May reports place inflation at 3.6%, up from 2.9% in April and from 1.4% a year ago. That's why income and corporate tax cuts totaling 45 billion marks ($20.2 billion) this year are having no visible impact.

As food and energy prices begin to ease this summer, consumer outlays should pick up. Consumer confidence actually rose in April. However, the export-led industrial weakness will get worse before it gets better. And any further stimulus from the European Central Bank expected this summer will come too little and too late to spur growth in 2001. By James C. Cooper & Kathleen Madigan

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