Germany: Growth Comes Creeping Back

Germany's economy is recovering, as industrial activity begins to stabilize, but growth this year will lag behind the rest of Europe, mainly because of an ailing consumer sector. New uncertainties over labor unrest and the September elections, as Chancellor Gerhard Schroeder struggles to retain control, also cloud the outlook.

First-quarter real gross domestic product, to be reported on May 23, is expected to post a slim gain, although remaining slightly below its year-ago level. Momentum will build gradually, with growth anticipated to average only 1% this year and 2.5% to 3% in 2003.

The household sector is still feeling the effects of higher-than-expected inflation and unemployment. February retail sales fell for the third month in a row, and March car registrations dropped. First-quarter retail sales are running below fourth-quarter levels. The good news is that inflation slowed in April to 1.6%, from 1.8% in March, as recent surges in food and energy began to wane. Inflation should continue to edge lower, if oil prices behave.

But wages are a new risk. IG Metall, Germany's second-largest union, voted on Apr. 30 to begin selective strikes by May 6, the first major job action since 1995. Talks collapsed when the union rejected a 3.3% wage hike. It is holding out for 4%, a level that could limit the recovery by lifting costs when companies have little pricing power.

A stronger industrial sector is crucial to better job growth. Growth in 2003 should put unemployment back on a downward path, but joblessness would stay stuck at about 9.6% this year and remain above 9% until late next year. March joblessness declined due to make-work programs.

Business sentiment, which had been moving up, fell in April, as retailers and wholesalers lost faith. Businesses' assessments of current conditions are still falling, suggesting that demand is not validating earlier optimism. May sentiment could drop, as well, if labor strife lifts uncertainty. That could mean little pickup in second-quarter GDP growth.

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