German Economy Gets a Zero

Signs that Germany’s ailing economy may be falling into a full-fledged recession intensified on Tuesday as a handful of the country’s leading business and economic institutes revised economic forecasts from marginal growth to a possible contraction of gross domestic product.

"An economic recovery during summer 2003 isn’t in sight," said Martin Wansleben, president of the German Chambers of Industry and Commerce (DIHK). "Instead, the German economy is in a persistently stagnant phase."

Using the dreaded term "red zero," as in red ink, DIHK is forecasting that the German economy will contract to below zero growth this year. This winter, the institute said it expected a marginal growth rate of gross domestic product of less than 1 percent.

During the first quarter, Germany’s $2.3 billion economy shrank by 0.2 percent over the previous quarter. And the bad news just keeps on coming.

The worst conditions in a decade

The news comes as little surprise to the 21,000 firms polled by the institute, who are expecting the worst business conditions in 10 years. Not since 1993’s recession has the confidence of German executives been so shaken. Only 17 percent of the companies polled said they had positive expectations for the economy this year, while 42 percent said they expected business conditions to be worse this year than last.

"Fears are increasing that exports, the foundation of economic growth (in Germany), are starting to crumble," said Wansleben. "The disappointing global economy following the end of the Iraq war as well as the speedy rise of the euro is shaking confidence in exports."

Businesses are particularly concerned about the United States, Germany’s second-largest trading partner. The weak dollar and skyrocketing euro threatens to make popular, high-quality German products – from automobiles to household appliances – prohibitively expensive and less competitive on the American market. But there are also signs of weakness in the traditionally strong export market for Germany’s neighbors.

"France, Italy and the Netherlands purchase nearly a quarter of all German exports, and their economies are also faltering," Wansleben noted.

Less than zero

DIHK’s report was compounded Tuesday by the latest forecast from the Hamburg Institute of International Economics (HWWA), which said it was expecting zero growth for the German economy this year. As recently as March, the institute was predicting 0.7 percent growth. Looking ahead, HWWA offered a slightly more optimistic prognosis of 1.5 percent growth in 2004.

HWWA said its adjusted calculations were largely attributable to the euro’s rapid climb. The currency’s value has risen markedly above the baseline used by HWWA in its previous forecast, and the institute warned that its further climb could hinder any turnaround of the German economy. HWWA said its current prediction of zero growth was based on the euro remaining stable at its current value.

Tuesday’s developments come on the heals of a similar report from the Kiel Institute for World Economics, which also recently revised its growth estimate downward to zero.

Nonetheless, the federal government is maintaining its forecast of 0.75 percent growth in GDP for the year – and it points to the April report released by Germany’s six largest economics institutes as justification. The two-month-old report predicted 0.5 percent growth for 2003 and 1.8 percent growth for the following year.

Business calls for reforms

Chancellor Gerhard Schröder’s government is currently seeking to push through an ambitious economic reform package to stimulate the economy. The plans call for heavy cuts to Germany’s unemployment and welfare benefits as well as a loosening of labor laws to make it easier for companies to hire and fire employees.

But German executives fear Schröder’s reforms will not be a strong enough prescription to jumpstart the economy. Wansleben said businesses fear the necessary reforms to the government’s social and fiscal policies won’t get past the early stages of political debate. He said executives also expected the government to reform its policies of generous subsidies as well as push through further tax cuts.

"We’ve already gotten to the point that when the chancellor or the economics minister start discussing pulling forward (planned) tax cuts, we start to wonder what kind of bluff package he’s going to present," Wansleben said. "The discussion is already characterized by distrust…."

Wansleben called on the federal government to provide a clear and decisive sign that it would push tough reforms through this year. 2003, he said, must be a year of reform – and any further "squabbling," will do little to help the limping economy