Growth Is Dragging Its Feet

Germany's economy is weakening again, raising the odds for a significant cut in interest rates and muddying the outlook for fiscal policy.

On Nov. 14, the Council of Economic Experts--the "Five Wise Men"--revised their forecast for real gross domestic product growth to 1 1/2% to 2% for 1995 and 1996. The new 1995 rate was one percent less than earlier projections. The strong mark and rising real wage costs--up more than 2% from a year ago--were the reasons for lower growth.

Certainly, the monthly data show signs of softness in Germany. Industrial production in September was down 2.9% from a year ago. Business confidence is eroding. The IFO Institute's business index fell to 94.5 in October, the fifth decline in a row (chart). The construction industry was particularly downbeat, because homebuilding will suffer after government mortgage subsidies expire next year. Also, the jobless rate inched up to 9.6% in October, from 9.5% in September. It's now the highest in more than a year.

Inflation continues its downtrend. Consumer prices fell in October and are up only 1.8% from a year earlier. The Bundesbank's key inflation gauge, the M3 money supply, rose at an annual rate of just 1.6% in the first nine months of 1995. Indeed, in its monthly economic report, even the hawkish Buba admitted that German inflation was "very moderate." On Nov. 15, the central bank let the securities-repurchase rate slip below 4% for the first time in more than seven years. Analysts expect a cut in the discount rate, now at 3.5%, by early 1996.

The weakening in economic growth, however, means that the government has had to recast its budget projections for 1996. As it stands, the budget will slip just under the goal of 3% of gross domestic product set by the Maastricht Treaty. But slow growth may lower revenues even further, especially proceeds expected from privatization. If so, fiscal plans will have to remain rigid in 1996, even as monetary policy turns more accommodative.

Before it's here, it's on the Bloomberg Terminal.