Germany: Banking on a Recovery after Midyear

At least for now, Germany's government is sticking with an upbeat forecast of a 1.25% gain in real gross domestic product in 2002. But private economists expect 1% or less. And while the difference seems small, slower growth has big implications for the euro, job prospects, and fiscal finances.

Germany's real GDP fell in the third quarter and likely shrank further at yearend. The December purchasing managers' index slipped, with production, inventories, and jobs falling. November factory orders rose, but domestic bookings alone fell for the third month in a row. And the labor markets continued to deteriorate in November. The jobless rate stayed at a high 9.5%, as the number of unemployed rose to 3.9 million, the largest amount in nearly two years.

Although the recent data are dismal, German executives are optimistic about a second-half recovery. Specifically, they expect exports to strengthen, but this implies other nations will turn around before Germany does.

The government is also hopeful about the second half. In an interview, Economics Minister Werner Muller said second-half demand would be lifted by lower taxes, increased family benefits, and low inflation. That's why the Finance Ministry is standing by its growth forecast of 1.25%. But private economists, including the government's outside economic advisers, known as the Five Wise Men, forecast real GDP growth of 0.7% in 2002.

The fear that Germany will undershoot its forecast has put downward pressure on the euro. After the jobs data were released on Jan. 9, the euro slipped again against the U.S. dollar. Slower growth may also lift Germany's fiscal deficit closer to the 3% of GDP ceiling imposed by the euro zone policymakers.

In addition, a magazine poll found that unemployment was a major concern for 55% of Germans, up from 37% in 2001. And 38% were worried about the economy, twice the rate of a year ago. These increased jitters could delay any meaningful rebound in consumer spending this year.

By James C. Cooper & Kathleen Madigan

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