Germany: What's Putting a Damper on Growth

Recovery in Germany will remain halting through the year. The economy barely grew in the first quarter after two quarters of contraction, and while export-oriented businesses are making headway, domestic demand remains stymied. The economy will struggle to grow 1% this year.

Consumer spending and business investment both declined in the first quarter, and neither is gaining ground in the second. Retail sales in May fell for the second month in a row, as May unemployment posted the largest rise in five years. The jump resulted in part from new legislation, strike activity, and holidays, but it also reflected a large number of job losers and poorer prospects of finding a job. Economic growth won't be strong enough to improve the labor market significantly until 2003.

Business sentiment is improving slowly. The closely watched index from the IFO institute dipped in June, and attitudes are mixed. Big exporters seem more confident, but builders and retailers are more pessimistic. On June 24, Germany's retail trade association slashed its sales forecast for this year.

Manufacturers' orders in April offered some hope as domestic orders gained. But April industrial production posted only a small rise. Output of export-sensitive capital goods rose, but production of consumer goods fell. With a self-sustaining recovery nowhere in sight, companies are cutting their investment and hiring plans for this year, says a recent survey of 20,000 executives by the DIHK industry and trade association.

On the plus side, weak domestic demand and falling oil prices are moderating inflation and delaying the urgency for the European Central Bank to raise interest rates. The euro's 12% rise vs. the dollar since February is an additional inflation dampener.

Eventually, rising exports will boost capital spending, and consumers will benefit from rising pay--helped by recent wage deals--along with low inflation and interest rates and planned tax cuts. But that is next year's story.

By James C. Cooper & Kathleen Madigan

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