German Growth Forecast Lower for 2008

The U.S. subprime crisis takes a toll, and a possible minimum wage hike could hurt employment, but Germany is still seen as a good place to do business

Just months ago, the German economy was buoyed by surprising bits of good news -- like strong growth and lower unemployment -- which indicated a minor boom. But 2007 took its toll, and now the German Economics Minister, Michael Glos, agrees with new, more pessimistic growth estimates. "It's too early for an exact prognosis," he told the mass-market Bild newspaper. "But in general I see economic growth in 2008 at just under 2 percent."

Glos' comments followed December reports from two German economic think tanks which weakened their growth estimates for 2008 from about 2.4 to 1.9 percent. The German government can't overlook these changes, said Glos, adding that the main reason for the correction was the American sub-prime mortgage crisis.

"To put it colorfully, international banks still have a lot of undiscovered corpses in their cellars," he told Bild.

Higher Wages?

But German employees may look forward to more earning power in 2008. Germany's Social Democratic Foreign Minister and Vice Chancellor, Frank-Walter Steinmeier, has come out in favor of a national minimum wage.

"Someone who works all day should be able to live on his pay," Steinmeier said to the Bild am Sonntag newspaper. "Employers should not be allowed to pay miserable wages and taxpayers forced to make up the difference."

Minimum wages are controversial in Germany, where postal workers have been granted the nation's first minimum wage starting January 1. The main German trade union has campaigned for a nationwide minimum wage of €7.50 ($11) per hour, and Steinmeier -- offering a preview of the Social Democrats' position in upcoming state elections -- said a wage between €7.20 and €7.50 was reasonable.

The issue has driven a wedge between Social Democrats and conservative Christian Democrats in Germany's grand coalition government. Chancellor Angela Merkel, a Christian Democrat, worries a minimum wage will ding employment figures and hurt Germany's minor economic boom.

But Steinmeier said, "Employees deserve to earn their fair share of the upswing in the form of higher wages in 2008."

One reason for the wage debate has been a spike in German inflation during 2007. Last year the Merkel government introduced a rise in "value-added" or sales tax (VAT) -- from 16 to 19 percent -- which sent 2007's inflation rate up to 2.2 percent, according to provisional figures published last week. But experts say that rise was a one-time knock that won't recur in 2008.

The gloomy forecasts haven't dampened Germany's image as a good place to do business. In a survey carried out by Droege & Comp. for the German business daily Handelsblatt, Germany was considered the most competitive economy in Europe.

The survey of 1,200 managers from six European countries put Germany ahead of Switzerland and Great Britiain, with 59 percent of those polled saying Germany's competitiveness was either "good" or "very good." Five years ago in a similar survey only 13 percent had given a positive assessment of Germany.

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