Under the weight of a strong mark, heavy taxes, and high labor costs, the German economy is looking surprisingly weak. Not only did real gross domestic product in the third quarter fail to grow, but October and November indicators strongly suggest that fourth-quarter GDP will post an outright decline. Economists are marking down their growth projections for 1995 and 1996.
Third-quarter GDP in Europe's leading economy showed an unhealthy mix of rising inventories and falling demand, suggesting a budding inventory problem that will weigh on future growth. Recent business surveys already have reported that stock levels are excessive. Indeed, in October, industrial production fell 1.6%, order volume in manufacturing dropped 2.4%, and retail sales posted a sharp 4% drop. Both industrial output and retail sales started the fourth quarter below their third-quarter levels.
With factories now cutting output, the inventory problem seems likely to be corrected quickly. The danger, however, is that if demand weakens further, it will drag out the inventory adjustment to the point where cutbacks in output and jobs feed back adversely on domestic demand. After November's 42,000 increase in unemployment, joblessness, at 9.7%, has risen back almost to the recession high of 9.8% hit in early 1994.
Another risk factor is labor strife in France, Germany's largest export market. The French rail strikes are temporarily affecting fourth-quarter output, but the real threat is the extent to which French Prime Minister Alain Juppe will abandon his plans to reform the country's bloated social-welfare system. And if the Juppe government actually falls, taking the franc and chances for the European Monetary Union with it, German exporters will feel a serious blow.
However, an all-out recession seems unlikely. As long as the franc stands firm and Bundesbank rate cuts weaken the mark, Germany's export machine should start humming again, stirring the economy back to life by mid-1996.