Eastern German Economy Catching Up

The former communist east is projected to grow faster than the west in 2008. Manufacturing is particularly dynamic

Oil and food prices may be skyrocketing, but the German economy is growing apace this spring. And according to the head of the German Chambers of Industry and Commerce (DIHK), the economy of former East Germany will grow faster than in the west in 2008 — meaning the formerly communist east is catching up.

DIHK chief Martin Wansleben told the Leipziger Volkszeitung that he expects growth in eastern Germany to hover around 4.5 percent for the year. For Germany as a whole, that number will be closer to 2.3 percent, DIHK economists forecast. Wansleben told the paper that the manufacturing sector was responsible for eastern Germany's positive performance.

Indeed, a recent study completed by the Initiative for New Social and Market Economy together with the business weekly Wirtschaftwoche found that the economies in eastern German states are among the most dynamic in Germany. The study took a variety of economic, structural and social factors into consideration and, though Hamburg came out on top, Mecklenburg-Lower Pomerania was second on the list. Brandenburg, Saxony and Berlin, likewise in eastern Germany, were also in the top half of the list.

The recent good news from Germany's east is just the latest sign that the economically struggling region may be finding its feet. Even as the eastern German economy expanded rapidly following 1990 reunification, it swooned from 1996 to 2005. For the last three years, however, eastern German employment has risen and the region has, particularly in manufacturing, made huge strides. The turnabout comes after years of stagnation and migration of young workers to the western part of the country. Now, according to Wansleben, eastern German industry plans to hire more workers than their western counterparts in 2008.

Partly as a result of the eastern German improvements, the EU thinks that the German economy could become the "locomotive of Europe" once again. Klaus Gretschmann, an economy expert with the European Council, told the paper Die Welt on Tuesday. German companies, he said, have become "more resistant to the shifts on the world market" and "have reformed themselves more thoroughly than those in other European countries."

Gretschmann said he anticipates the German economy will grow by more than 2 percent this year. The influential Institute for the German Economy in Cologne bumped up its growth expectation for 2008 to 2.5 percent on Monday. The German government expects growth for the year to be 1.7 percent.

But the future, may not be so rosy. The ZEW Indicator of Economic Sentiment, an important measure of how financial analysts see the near future taken monthly by the Centre for European Economic Research, is at its lowest level since 1992, the group announced on Tuesday.

Wansleben from the DIHK is likewise not overly optimistic. Exports have long been the main engine of the German economy, and with the euro consistently high against the dollar, Wansleben anticipates that exports will begin falling in coming months. "In 2009," he writes in a Monday report presented on Monday, "there will likely be just a one before the decimal point."

Before it's here, it's on the Bloomberg Terminal.