Germany: No Glimmer of Relief from the Gloom

Is the European Central Bank fiddling while Germany burns? The euro zone's largest economy could use help, but it won't come anytime soon from policymakers.

Weakness in retail sales and industrial output suggests that German real gross domestic product fell in the second quarter after rising at a 1.4% annual rate in the first. And sagging orders hint that the second half will be soft, too. For all of 2001, real GDP growth is sure to miss the government's 2% forecast. The economy grew 3.1% in 2000.

Domestic demand is especially vulnerable to the drags of higher energy costs and a sluggish labor market. In 1999 and 2000, the jobless rate fell almost 1 1/2 percentage points. But it has held at 9.3% for the first six months of this year. That has led to a drop in consumer confidence and a decline in shopping. Retail volume in May was down about 2% from a year ago.

As a result, domestic orders for German factory goods so far in the second quarter are down by a 2.4% annual rate when compared with their first-quarter level. Industrial production thus far in the second quarter has dropped by a 10% annual rate from the first-quarter average (chart).

All this bad news is darkening the mood of company executives. Business confidence has been sinking like a stone all year, pulled down by growing pessimism for both the current economic climate and expectations.

Despite this backdrop of gloom, the ECB remains intransigent against cutting interest rates;

policymakers are sticking with their mandate to fight inflation--not promote growth. The ECB trimmed rates by a quarter-point on May 10 but has held firm since then. In its July report, the bank said that current policy "remains appropriate to ensure price stability will prevail."

The ECB is unlikely to cut rates before its summer recess starts on Aug. 2, even though analysts think euro zone inflation peaked back in May at 3.4%. Given the lags in monetary policy, the delay means Germany will receive little stimulus before early 2002.

By James C. Cooper & Kathleen Madigan

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