Germany: A Brief Recession--If Exports Pick Up

Tenuous hopes that Germany might avoid recession dissolved on Feb. 27, when news showed that the economy contracted for two quarters in a row.

Fourth-quarter real gross domestic product fell by 0.3%. The decline was the largest in 3 1/2 years; it followed a 0.2% drop in the third quarter. Germany is now the laggard of the 12-member euro zone.

Only the government sector showed any strength at the end of 2001, although a smaller drawdown in inventories added to real GDP growth last quarter. Perhaps most worrisome was the 1.1% drop in exports, the first decline in three years. Exports had been Germany's key source of growth. The slowdown in the rest of the euro zone--plus the U.S. recession--has cut into demand for German goods.

For 2002, the economy is expected to grow between 0.7% and 2.5%, but the early data suggest the first half will be much weaker than the latter half. The purchasing managers' index rose, but the level still suggests that the factory sector is shrinking. Business expectations surged in February as executives hoped for a second-half recovery, but the reading on current economic conditions slipped further. At least, the job markets may have stopped deteriorating. The number of unemployed rose by only 1,000 in February, the smallest loss in over a year (chart).

Growth will pick up later in the year, when German exports rebound--perhaps quite sharply if the rest of the euro zone snaps back. Meanwhile, slack domestic demand and cheaper fuel have kept German inflation low. In January, producer prices were down 0.1% from a year ago, and in February, the yearly gain in consumer prices was just 1.7%.

Despite mild inflation, German companies cannot count on declining interest rates to provide any help. The shift in expectations means that the European Central Bank is sure to keep rates on hold in coming months. Its next move will be a rate hike following any tightening by the U.S. Federal Reserve, but that's more likely a second-half event.

By James C. Cooper & Kathleen Madigan

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