Commentary: A Glimpse Of Hope For Germany...

Small signs of improvement are making optimists of some economists

Headlines of massive job cuts at retailer KarstadtQuelle. Strikes at Adam Opel (GM ) by auto workers desperate to avert layoffs and plant closings. And ever-deepening pessimism: Only 35% of Germans expect to be better off in a year, compared with 51% of the French, according to market researcher NOP World. Gloom, gloom, and more gloom. A perfect scenario, in short, for a turnaround.

Say what? Yes, that conclusion sounds outrageous given that Germany is in the midst of its most miserable decade since World War II and that government hasn't done enough to deregulate labor and modernize the economy. But look closely and you can see tentative signs that after a decade of persistently high unemployment and slow growth, things could start looking up for Germany.

That, at least, is the opinion of a hardy minority of observers. While many investors focus on the jobs disaster, optimists -- including the prestigious German Institute for Economic Research in Berlin -- are beginning to notice odd gleams of light. In the recently released 2004 ranking of global business competitiveness from the World Economic Forum, which grades countries on the basis of microeconomic factors such as the innovativeness of local companies, Germany moved from fifth to third place, after the U.S. and Finland. The German Engineering Federation has just released figures showing that its members, typically midsize machine-tool makers that collectively employ 864,000 people, are in the midst of a solid recovery. Orders are up 16% through August over the same period last year, and factories are running at near capacity. Based partly on these encouraging indicators, the Institute of German Economics, a think tank in Cologne financed by business groups, is now predicting that growth will edge up to 2% in 2005, from 1.75% in 2004, amid a boom in exports. "Germany is at a crossroads," says Michael Grömling, head of macroeconomics at the Cologne Institute. If domestic investment picks up and unemployment begins to head downward, the country could see sustained growth, he believes.

Granted, the pessimists are winning in Germany. The new consensus forecast released by Germany's leading economic institutes is that growth will slow to 1.5% in 2005, as rising fuel prices put a damper on consumer spending.

Still, there's a school of thought that says longer working hours and corporate restructuring are gradually making German products more competitive on world markets. "There are signs that things are improving, if you look at profitability and unit labor costs," says Nicolas Sobczak, an economist at Goldman, Sachs & Co. (GS ) in Paris. "There is probably light at the end of the tunnel." In addition, economists such as Annemarieke Christian and Joachim Fels at Morgan Stanley argue that labor-market reforms by Chancellor Gerhard Schröder's center-left government, however tepid, are encouraging unemployed people to take low-wage jobs, which will help jog consumer spending.

Rising oil prices could even hold a hidden blessing. Oil-producing countries such as Russia, Saudi Arabia, and Malaysia will have more money to buy German goods. "Past experience has shown that they will invest" in German machinery, says Olaf Wortmann, an economic forecaster for the German Engineering Federation.

Indeed, despite the strong euro, Germany's overall exports should register 10% growth this year. And as German plants reach capacity, managers will start to make overdue improvements in technology. "There are clear signs that investment in Germany is increasing. There's definitely pent-up demand," says Dieter Brucklacher, president of Oberkochen-based Leitz, the world's leading maker of industrial woodworking tools.

In the optimists' world, even the horrendous headlines about German job losses have their place. One more big wave of cuts and Germany will be a lot more competitive. Those employment reductions are certainly coming since auto maker Volkswagen and almost all of Germany's big banks are still overstaffed. With pain like that, Germans are certainly due for a happy ending.

By Jack Ewing

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