Monday, September 21, 2009

Economic Realism in Germany

Germany’s recovery from recession came in time to give a boost to Chancellor Angela Merkel’s re- election bid in the Sept. 27 vote. It may not last much longer.

Unemployment is set to jump and consumer spending to fall in 2010 as government stimulus runs out, according to the Halle- based IWH institute, an adviser to the government. Companies are warning of a credit crunch, and debt at a post-World War II high leaves policy makers with few options to counter a double dip.

“The pace of the upswing can’t be maintained,” said Klaus Baader, co-chief European economist at Societe Generale SA in London. “Next year is going to be more difficult, with unemployment rising and government stimulus petering out.”

Exceptional measures of 85 billion euros ($124 billion) lifted spending and subsidized jobs, helping keep unemployment below levels in the U.S. and France, even as the economy suffered its worst post-World War II recession.

The return to growth in the second quarter enabled Merkel, 55, to “exploit” the issue in her campaign, Laurent Bilke, an economist at Nomura International, said in an interview.

Five polls last week gave Merkel’s Christian Democratic Union a lead of between nine and 13 percentage points over her main challenger, Social Democratic Foreign Minister Frank-Walter Steinmeier, 53.

“We’re through the worst,” Laurenz Meyer, economic spokesman in parliament for the CDU, said in an interview. “But the second wave of this crisis has yet to hit us.”

Economic Forecasts

Germany, the world’s biggest exporter, was hammered by the global contraction as sales of Wolfsburg-based Volkswagen AG cars and Munich-based Siemens AG equipment slumped. The government has forecast a 2009 economic contraction of as much as 6 percent.

Spurred by extra spending equal to 1.6 percent of gross domestic product in 2009, the economy grew 0.3 percent in the second quarter, confounding economists’ forecasts. It may expand another 0.8 percent in this quarter. Growth may reach 0.9 percent in 2010, the IWH institute says.

Reflecting the rebound, the benchmark DAX stock index has rallied 56 percent since March 6. Still, German government bonds have outperformed U.S. Treasuries this year on expectations the U.S. economy will grow more strongly.

Germany, Europe’s biggest economy “isn’t out of the woods yet,” Finance Minister Peer Steinbrueck said Sept. 1.

Candidates’ Pledges

The Christian Democrats have pledged across-the-board tax cuts worth about 15 billion euros and looser labor-market rules making it easier to fire employees. Steinmeier said during a televised debate on Sept. 13 that Merkel has a “credibility problem” over her plan to lower taxes even as debt soars. The Social Democrats propose tax cuts for the lowest incomes and want a universal minimum wage of 7.50 euros an hour.

“The chancellor is not to be envied,” Ulrich Kater, chief economist at Dekabank in Frankfurt, said in an interview. “Having rescued the economy through large government aid programs will soon be forgotten and what’s left is cleaning up the mess.”

For instance, Germany’s 5 billion-euro “cash-for- clunkers” program, the world’s largest, ended this month, removing support that shoppers have depended upon.

The car-scrapping premium, which was emulated from the U.K. to the U.S., led to a 23 percent increase on spending for vehicles in the first six months. The Federal Statistics Office attributed the second-quarter rebound to those purchases.

There are no signs consumer spending overall has stabilized, the Kiel-based IfW economic institute said in a Sept. 9 report. The results are already being felt.

Opel Job Cuts

General Motors Co.’s German Opel unit, one of the main beneficiaries of the subsidy, may shed 4,000 jobs in Germany as part of a plan to cut 10,500 jobs across Europe to return to profitability. As many as 50 auto suppliers face insolvency by the end of this year, according to a study by Roland Berger Strategy Consultants.

Insolvent retailer Arcandor AG, which failed in its quest for government aid this year, will cut 3,700 mail-order jobs and close 19 Karstadt department stores under plans unveiled last month by the company’s administrator.

The unemployment rate will jump to 10.3 percent in 2010 from 8.1 percent this year, the IWH institute forecast on Sept. 15. Consumer spending will drop 0.7 percent in 2010 after growing 0.5 percent this year, it said.

Subsidized Jobs

Jobs have been subsidized by the Federal Labor Agency, which pays 60 percent of the net wage that’s lost due to reduced working hours. The program, extended to 24 months in May from 18 months, supported about 1.4 million employees at some 50,000 companies as of June.

Holding on to workers with little to do may prove too expensive. Labor costs per working hour rose 4.8 percent in the second quarter from a year earlier, the second-biggest increase after a record 5.3 percent jump in the first three months, the statistics office said Sept. 15.

“It would be a mistake to underestimate the longer-term consequences of the past 18 months,” the BDB association of German banks said in a report on Sept. 9. “It will take three to four years until production is back at a pre-crisis level.”

Adding to the burden, the BGA association of wholesalers and exporters said Sept. 15 that 42 percent of its members expect credit to tighten. Small and mid-sized companies, which provide 70 percent of jobs, will face tougher loan conditions in the first half of 2010, Deputy Economy Minister Hartmut Schauerte said last month.

Increased Borrowing

Faced with such gloom, the next chancellor will have few tools to deploy. Net new borrowing will almost double next year to 86.1 billion euros from a record 47.6 billion euros this year, according to the government budget.

“There’s quite a bit of bad news left to digest,” Elga Bartsch, chief European economist at Morgan Stanley in London, said in an interview. “The challenge for the next government is that its fortunes hinge on economic indicators that trail the business cycle.”

German recovery loses momentum
By Ralph Atkins in Frankfurt

Published: September 24 2009 11:13 | Last updated: September 24 2009 11:13

Germany’s economic recovery is losing momentum, with business confidence rising less than expected this month, according to a closely watched survey that highlights the fragility of continental Europe’s return to growth.

The Munich-based Ifo institute reported its business climate index rose from 90.5 in August to 91.3 in September. That was the highest reading since September last year, when Lehman Brothers collapsed in the US. But it fell short of economists’ expectations, suggesting some of the recent optimism about Europe’s largest economy may have been overdone.

The Ifo index, which is regarded as offering a good guide to future activity, plunged dramatically late last year as global demand for German products slumped, and in March reached its lowest level since the pan-German survey started in 1991. It has since staged a “v-shaped” revival, pointing to a robust recovery. That fitted with other economic evidence showing industrial orders picking up as German exporters benefited from the revival in global growth prospects. Germany exited recession in the second quarter, when gross domestic product rose 0.3 per cent.

However, the rate of increase in the Ifo index slowed markedly in September. Hans Werner Sinn, Ifo president, pointed out that most companies still regarded current business conditions as poor. Instead, the rise in the index had been driven largely by the component covering businesses’ expectations for the next six months – which has risen for nine consecutive months to the highest level since May 2008.

Mr Sinn argued that “compared with the catastrophic developments of the past 12 months, this is good news”. Economists still expect a strong third quarter economic performance and Andreas Rees, economist at UniCredit in Munich, argued that the strength of business confidence about the months ahead meant “we do not expect any abrupt shift any time soon – momentum in major German export markets is simply too strong”.

However, the results are likely to add to policymakers’ concerns about the sustainability of Germany’s recovery. The country’s economy is still expected to shrink by about 5 per cent this year, with the under-utilisation of capacity to feed through into higher unemployment – which in turn will act as a further constraint on growth. Industrial associations have also warned that banks’ restrictions on credit provision will act as a brake on growth.

The Ifo results followed weaker-than-expected eurozone purchasing managers’ indices earlier this week, which also pointed to an improvement in prospects but at a slower pace. France, rather than Germany, appeared to have largely driven September’s improvement.

The European Central Bank has warned that the outlook for the eurozone – in which Germany is the largest economy – remains uncertain and that the recovery will be gradual. It is widely expected to keep its main interest rate unchanged at 1 per cent well into next year.

Merkel warns G20 against focus on imbalances
By Bertrand Benoit in Berlin

Published: September 24 2009 10:50 | Last updated: September 24 2009 10:50

Angela Merkel warned fellow world leaders on Thursday not to make the fight against global imbalances the central issue of a meeting of the world’s 20 largest economies, which kicks off in Pittsburgh on Thursday night.

Speaking in Berlin before boarding her flight, Ms Merkel came close to accusing the US and Britain of backtracking on the issues of financial market regulation and global limits on bonuses for bankers by shining the spotlight on the export-oriented economic policies of Germany and China.

“We should not start looking for ersatz issues and forget the topic of financial market regulation,” she said in her clearest comments to date. “We cannot afford to neglect this issue now.”

Ms Merkel turned on Washington, saying: “Imbalances are an issue, but we must look at all the factors . . . We must talk about imbalances and name the reasons why they came into being.”

“We should also look at imbalances between currency regions and not pick on specific countries within the eurozone,” she added, referring to criticism from the US that Germany is not doing enough to support its domestic demand.”

Germany, she said, had acted “as a stabilising force. Our trade surplus has become much smaller. We import more today because of our fiscal stimuli and our automatic stabilisers”.

Ms Merkel criticised London for neglecting to address the long-term fiscal impact of growth-boosting measures: “We should not – and this is a big issue in our talks with our British friends – push for higher growth and say we’re not interested in how we do it. This has to be sustainable growth.”

Berlin has grown concerned in the past few days that the US and the UK could use Pittsburgh – the third time G20 leaders will have met to forge a joint response to last year’s financial crisis – to put pressure on Germany and China to change their economic policies.

Early drafts of the meeting’s final communiqué sent by Michael Froman, economic advisor to US president Barack Obama, suggest Washington wants to make the discussion of global imbalances a centrepiece of the talks.

Speaking alongside Ms Merkel, Peer Steinbrück, the German finance minister, who will joint his G20 counterparts at the summit, was even clearer in his criticism.

In a clear jibe at London, he said he expected “all EU member states” present in Pittsburgh to back this week’s European Commission proposals on a tougher financial market rulebook “and to work towards their implementation.”

“We can talk about global imbalances,” Mr Steinbrück said, “but without pre-conditions. Let’s talk for instance about the US deficits and the enormous capital inflows needed to finance them . . . Let’s talk about the fact that the Chinese currency is still not convertible. Sure we can talk, but not selectively.”

Asked whether he thought the British government was softening its position on financial regulation under pressure from the City of London, Mr Steinbrück said: “It’s not just my perception. If you listen around, many think there is massive lobbying for hard-nosed regional interests going on.”

“Resistance from Wall Street and the City,” he said, was legitimate but should not be allowed to derail an international agreement on tougher financial market rules.

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