Germany: Exports Are Carrying The Recovery

Many economists are reassessing the strength of Germany's recovery. In particular, the Organization for Economic Cooperation & Development boosted its growth forecast for 1994 by a full percentage point, to 1.8%, and it lifted projected growth for 1995 from 2.2% to 2.6%. With the Oct. 16 Bundestag elections looming, Bonn is hinting that it will lift this year's official 1.5% forecast, as well.

Is the economy out of the woods? Probably. Strong export growth across most categories and regions is more than offsetting consumer-led weakness in domestic demand. Although exports to the European Union--54% of Germany's total--remain weak, shipments to non-EU countries are robust, and exports to the EU will pick up as Europe's recovery gels.

In the second half of 1993, German exports to Eastern Europe surged 32%, at an annual rate, from the first half. Shipments to the U.S. rose 23.9%, while exports to non-Japanese Asia were up 25.2%, and shipments to Japan rose 76.3%, say researchers at J.P. Morgan & Co. This strength is why foreign shipments of goods have risen at a robust 14% annual rate during the past three quarters. And it's exports that are fueling industrial production (chart).

Still, don't expect second-quarter growth in real gross domestic product to match the 2.2% annual rate of gain posted in the first quarter. Excluding a 6.2% surge in first-quarter construction, the result of mild weather, domestic demand was flat. But in April, construction dropped 5%, and in May industrial production fell 0.7%, while the April gain was cut from 2.5% to 1.2%. Also, manufacturers' orders in May dipped 0.2%, after a 0.6% decline in April.

These numbers do not imply that the recovery is faltering, but they do suggest that it will remain the slowest of Germany's three upturns since 1975, as fiscal restraint, falling real wages, and declining employment depress aftertax incomes. In addition, export orders weakened in both April and May, partly reflecting the stronger mark.

As a result, consumer price inflation in June dipped to 2.9%, a three-year low, and the OECD expects the rate to fall to 2% by 1995. That trend is consistent with further Bundesbank cuts in short-term interest rates, and lower long-term rates would seem to be in the offing as well.

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