| S&P sees moderate German slowdown |
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| Written by Adrie van der Luijt | |
| Tuesday, 29 April 2008 | |
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Signs of fatigue in the German economy raise the question of whether the country is headed for a rapid downturn. A report titled European Economic Forecast: Is Germany About To Stumble?, published by Standard & Poor's, however, predicts a moderate slowdown, supported by continued business investments and the release of pent-up consumer demand. Major engine of the Eurozone economy "While Germany cannot avoid the effects of the global slowdown, we believe there are grounds for optimism, not least because of the strength of the country's economic fundamentals," says Jean-Michel Six, Standard & Poor's chief economist for Europe. Germany is a major engine of the Eurozone economy. Last year, the country posted respectable GDP growth of 2.5 per cent, slightly down from 2.9 per cent in 2006. Looking ahead, however, things are not quite as rosy. Foreign orders dipped 1.1 per cent in the 12 months to February, which suggests that the strong euro, combined with weaker demand from major markets such as the US, is crimping German exports. More recently, the April index of economic sentiment from the Centre for European Economic Research (ZEW) dropped unexpectedly into territory more akin to that expected in a recession. Inflation, meanwhile, reached 3.1 per cent in the 12 months to March 2008, its highest level since the harmonised consumer price index was implemented in the mid-1990s. Export growth to ease back Strong economic fundamentals should mitigate these negative forces. Improvements in cost competitiveness since 2000 mean that German exports should hold up well against slower growth in world trade and a rising euro. Their contribution to GDP growth will be limited in the coming year-and-a-half, however, by the rapid decline in demand from the US and the easing in the Eurozone and new EU member states. Furthermore, demand from oil-producing countries and China will not fully compensate these declines. Therefore, S&P expect export growth to ease back to 5.0 per cent in 2008 and 4.0 per cent next year, from 8.5 per cent in 2007. In the non-financial corporate sector, a combination of high profitability, recent deleveraging actions, and continued ready access to credit should continue to support capital formation in the current environment, even if at a more moderate pace. The sector did not participate in the credit cycle upswing between 2002 and mid-2007. Rather, German companies repaired their balance sheets during that time. Disposable incomes set to rise At the peak of the credit cycle in mid-2007, firms were posting at a consolidated macroeconomic level a financial surplus - in sharp contrast with their Spanish, French, and Italian counterparts. German consumer demand should also make a more significant contribution to GDP in 2008 and 2009. Real disposable incomes look set to rise, and in contrast with 2007, employee contributions and fiscal charges will not offset these increases. Although this does not automatically translate into higher spending, pent-up demand from past years and an increase in retail price inflation should eventually boost consumer demand. Six says that the German economy is in many ways a special case. "Its private sector does not present the same post-credit cycle stress symptoms of high leverage, high exposure to interest rates, and high exposure to inflated collaterals as some other OECD economies,” he adds. Interest rate cuts Six points out that this goes a long way to explain the current stance of the European Central Bank (ECB) and its reluctance to cut interest rates. Nevertheless, there is now a serious risk that the strengthening euro, in large part driven by interest rate differentials, is going to harm Germany's growth prospects. An interest rate cut of 25 basis points by the ECB, however, is unlikely to have much effect on the euro exchange rate. This is not to say that the ECB won't cut interest rates at all this year: It may do so in the summer if more tangible signs of a slowdown materialise in the Eurozone (read: Germany). There is, however, no reason at present to expect any early moves by the Central Bank. Related articles
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