Gloom Deepens Over German Economy | Business| Economy and finance news from a German perspective | DW | 19.10.2004
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Gloom Deepens Over German Economy

The German economy is recovering, but the modest upturn will lose momentum as early as next year as a result of surging oil prices and a slowdown in exports, leading economic research institutes said Tuesday.

A cloudy 2005 lies ahead

A cloudy 2005 lies ahead

In the traditional autumn report published by Germany's six leading economic research institutes, five of the think tanks -- Ifo in Munich, HWWA in Hamburg, RWI in Essen, IfW in Kiel and IWH in Halle -- said they expected growth to slow to 1.5 percent next year from an anticipated 1.8 percent this year.

Only the Berlin-based DIW was more optimistic, predicting growth of two percent in 2005.

The tentative economic recovery in Germany "has strengthened noticeably in the first half of this year," the institutes said. Nevertheless, "compared with past periods of upturn, growth momentum remains weak," they said.

Growth impulses were coming solely from abroad "and they haven't yet jumped over to the domestic demand, which has remained weak for an unusually long time," the report said.

It added that since the global upturn particularly in the United States and China is losing speed, the impulses for the German economy coming from exports can be expected to weaken.

Oil prices in particular constituted a "special risk" for the global economy, since they will put the brakes on private consumption, the institutes warned.

The DIHK federation of German chambers of commerce similarly predicted a sharp slowdown in growth next year.

Based on the results of its regular survey of 25,000 companies, DIHK said it was forecasting growth of 1.5 percent in 2005, down from just under 2.0 percent this year.

Nevertheless, that was still an achievement in view of the fact that the German economy stagnated for three years until 2003, DIHK president Martin Wansleben noted.

The economy "will continue to make progress in 2005, albeit bit by bit," he said.

Slowdown in exports

In its October monthly report, published Monday, Germany's Bundesbank estimated that economic growth in Germany has slowed in the third quarter of this year as exports -- the main engine behind growth in the previous quarters -- have hit a wall.

"Compared with the preceding quarter when growth reached 0.5 percent, the momentum is likely to have lessened somewhat," the German central bank wrote.

Gross domestic product (GDP) in Germany expanded by 0.4 percent in the first three months of the current year and growth picked up fractionally to 0.5 percent in following three months.

The anticipated slowdown in the third quarter was largely attributable to "somewhat calmer overseas demand" for German-made goods, the Bundesbank said.

"Domestic demand has not been able to compensate for this, even if household spending has picked up somewhat compared with the spring," the bank wrote.

High oil prices


In its monthly report, the Bundesbank also warned that oil prices, one of the main culprits behind slowing global growth, could remain high for some time to come.

"On the international oil markets, prices have shot up as far as 50 dollars per barrel in recent weeks," the bank wrote. "In fact, given continued strong international demand and restricted capacity reserves, the impression has arisen that oil prices will remain high for a long time."

On Monday, oil prices shot up to a new record high of more than $55 (€44.71) per barrel.

The Bundesbank's comments appear to differ from the official view of the European Central Bank which has so far said the rise in the price of oil has been exaggerated and will soon start to come down.

Indeed, a top ECB official said in a newspaper interview Monday that the guardian of the euro was still confident that the conditions for recovery remained intact.

"Naturally, uncertainty has increased as a result of oil prices and of a few mixed economic signals," ECB executive board member Jose Manuel Gonzales-Paramo told the German business daily Handelsblatt.

"But I don't believe so far that we have to alter our forecasts," he added. "Recovery is continuing."

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