Germany Teeters on the Edge of Recession
While Chancellor Angela Merkel embroiled herself in the endless search for a solution to the sovereign debt woes of Greece, Spain, Portugal, Italy, and Ireland, Germany’s multinationals and Mittelstand companies increased exports to East Asia, Latin America, and elsewhere. Local German consumption was fairly robust, too. So why have Goldman Sachs economists Jan Hatzius and Dominic Wilson predicted a recession for Germany in the midst of all this plenty?
The pair says that the euro crisis is catching up with Europe’s top economy. The political squabbling across the Continent has affected business confidence in much of Europe and now Germany as well. Gross domestic product grew only 0.1 percent in the second quarter compared with the previous quarter. Orders for German companies fell for a second month in August, the manufacturing sector expanded at the weakest pace in two years in September, and in the same month German business confidence dropped to a 15-month low. “At the moment, companies are benefiting from existing orders on their books,” says Andreas Scheuerle, an economist at DekaBank in Frankfurt. “But we have to expect weaker data as fears about the debt crisis and financial market tensions push back investment decisions. I’m seriously concerned about a recession.”
As bond vigilantes drive the price of Greek, Portuguese, Italian, and Spanish sovereign debt further down, Europe’s banks, which hold much of that debt, are bracing for big write-offs. In these circumstances, Europe’s banks are leery of lending even to each other. In the third quarter, European banks have also made it much tougher for their retail and corporate customers to get loans, depriving companies and households of funds that could go toward purchasing German goods. “The further deterioration in the economics and financial situation in the euro has led us to downgrade our global forecast significantly,” wrote Hatzius and Wilson on Oct. 3. “We now expect a mild recession in Germany and France, and a deeper downturn in the euro periphery.”
Goldman figures the euro zone will grow only 0.1 percent next year, down from 1.6 percent this year. “Given the sustained level of risk aversion on financial markets, companies around the globe may want to play it safe, postponing new orders or investing less strongly than previously,” says Andreas Rees, chief German economist at Unicredit MIB in Munich.
Top companies in Germany are still doing well. BMW, Daimler’s Mercedes-Benz, and Volkswagen’s Audi are targeting record sales this year, while orders at Munich-based Siemens, Europe’s largest engineering company, have never been better, Chief Executive Officer Peter Löscher says. German exports will pass the €1 trillion ($1.4 trillion) mark for the first time this year, even if they stall for the remainder of 2011. Many of the new orders are coming from outside the euro zone.
Yet the euro area still accounts for more than 40 percent of Germany’s exports, and demand in the region is weakening. The prolonged struggle to save the euro zone’s southern tier has rattled investors, who have wiped away some $10 trillion from stock markets since May. The market turmoil is now spilling over into the real economy. Greece and Portugal already are fighting recession, while Spain and Italy are growing very weakly. “The bad memories of 2008 are returning,” says Carsten Brzeski, senior economist at ING Group in Brussels, referring to the devastating impact the collapse of Lehman Brothers and Royal Bank of Scotland Group had on each side of the Atlantic.
A German recession is not a foregone conclusion. The country’s central bank is sticking to its 2011 forecast of 3 percent growth. While “the economic outlook has been dampened by high overall uncertainty,” the Bundesbank expects “economic activity to remain robust in the third quarter,” Jens Weidmann, its president, said on Sept. 26. Robin Marshall, director of fixed income at Smith & Williamson Investment Management in London, says he too worries about a German recession. Yet he points out that the European Central Bank, which has kept its benchmark rate at 1.50 percent, will probably cut rates to stave off a deep downturn. “That in turn will probably drive the exchange rate lower,” says Marshall. A cheaper euro, combined with high German manufacturing productivity, would make German products more attractive to foreign buyers.
Germany’s—and Europe’s—fate may be clearer in a month, the approximate deadline Europe’s leaders have set for coming up with a solution to the euro crisis. If a cure can be found and Germany avoids recession, Europe will be better off.