Opinion: No Reason for Recession Talk in Germany | Business| Economy and finance news from a German perspective | DW | 17.04.2008
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Opinion: No Reason for Recession Talk in Germany

Germany's leading economic research institutes on Thursday, April 17, published their outlook for the coming year. According to DW's Karl Zawadzky, there's no reason to get pessimistic.

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The title of the spring report of Germany's leading economic research institutes hits the nail on the head: "Consequences of US Real Estate Crisis Dampen Economic Cycle."

That's it. And it couldn't be any other way. When the world's largest economy slides into recession as a result of crises in the real-estate and banking sectors, it puts a damper on Europe and, especially, the German economy, which is integrated into the global market like no other.

A drop in private consumption and investment in the US hurt German exports even if only eight percent of them are headed for America.

Karl Zawadzky

Karl Zawadzky

On top of that, German banks also irresponsibly participated in reckless ventures with American subprime mortgages and now have to deal with enormous write-offs. Billions and billions of dollars and euros have been destroyed by bank managers who often didn't even understand what they were doing when they were buying American subprime mortgage packages.

Now the money's missing as a lubricant for the real economy. The consequences of the financial market crisis are far from having been dealt with. Banks are still mainly concerned with themselves, which is why economic institutes are counting on further economic downturns for the coming year. There's reason to believe that they're not wrong.

Apart from the US recession and the crisis of the financial markets, three major risks are threatening the economic cycle: a strong euro, high oil prices and inflation, the latter having risen to 3.6 percent in the euro zone.

That's put the European Central Bank between a rock and hard place. While it should counter the economic downturn with interest rate cuts, inflation can only be dealt with via higher interest rates. Since both cannot happen at the same time, the bank has voiced concerns, but failed to act.

The strong euro makes it more difficult to export goods to the dollar zone. But at the same time, it means that rising import prices for crude oil and natural gas, which are paid for in dollars, will be cushioned once converted into euros and won't hit consumers that hard.

Still, dampened growth expectations are starting to get to companies and consumers. Actually, there's no reason to drop the optimism about the economic outlook and start looking at the world through pessimistic glasses. The German economy keeps growing, even if significantly slower -- at 1.8 percent in 2008 and 1.4 percent in 2009 -- than during the previous two years.

There's no reason to talk about recession, either. Germany's exports keep breaking records and carry the economy. Companies that cut their costs, modernized production and internationalized distribution and service during the last economic downturn are now reaping the benefits of these measures.

Production has reached full capacity in many firms in such a way that a slight increase in orders can no longer be dealt with via overtime, but leads to new hires. During the late 1990s, economic growth had to reach 2.5 percent to create new jobs -- now, anything above 1 percent will lead to new positions despite ongoing streamlining.

It means that the unemployment rate will keep dropping. On average, less than three million people could be out of work next year. This should encourage politicians to support employment with further reforms. Unfortunately, the opposite is happening: Faced with a general election next year, the government and political parties are rapidly losing their reform fervor. On top of the financial market crisis, the strong euro, the high oil price and inflation, the paused political reform is turning into a fifth risk for the economy.

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