by Venla Sipila, WMRC
Latest data heighten concerns that the recovery in Europe's biggest economy will stall before even taking off. The German economy performed well during the first half of this year: the first quarter saw growth of 0.4%, which accelerated to 0.5% in the second. While the tide has clearly turned enough to shift last year's deterioration firmly into recovery (in annual terms), the economy is struggling to maintain this momentum.
Indeed, mounting signs point toward decelerating GDP growth over the last two quarters of 2004. The closely followed expectations index from the leading German economic institute, the Center for European Economic Research (ZEW), plunged by 7.1 points in October, to 31.1 points, after also falling in the previous two months. (The index has a positive value if a majority of the nearly 300 investors and analysts polled believe that the economic situation will improve over the next six months; it is negative on expectations of a deterioration.) The ZEW index now lies at its lowest value in 16 months, and well below its historical average of 34.7 points.
Investor expectations are falling due to increased fears of a global slowdown. Any deterioration in the world economy would be detrimental to Germany's growth, since its upturn this year is almost entirely export-led. Worryingly, the German trade surplus narrowed for a second consecutive month, recording its lowest level in August since December 2003, as exports dropped by a seasonally adjusted 1.4% from July. In addition, industrial output fell by a seasonally adjusted 1.0% during August. Meanwhile, orders declined 1.5% from July, mainly due to weakening international demand. Of course, another factor undermining investors' optimism is the sky-high world price of oil—crude prices topped US$54 per barrel in New York (NYMEX) on 12 October.
The risk that the global recovery fades before Germany's domestic demand picks up looks all the more likely now. Although the latest retail sales (August) and the consumer climate index (October) readings each improved from the previous month, the picture remains rather gloomy, as both were down from a year earlier. Indeed, German retailers expect a sales decline for all of 2004.
Domestic demand remains subdued, with consumers concerned about the persistently high unemployment rate and negative impacts from the government's social reforms. Indeed, the fragile German recovery has been unable to create jobs this year. While the unadjusted unemployment rate dropped slightly in September, from 10.5% in August to 10.3%, the seasonally adjusted jobless rate rose from 10.6% to 10.7%. This marks the highest unemployment rate since February 1999. There were some 89,000 fewer persons unemployed in September than in August, but the jobless figure was up 48,900 from a year earlier. Adjusted for seasonal factors, though, the number of unemployed increased by 27,000 from August, to 4.44 million. September marked the eighth consecutive rise in the country's adjusted unemployment rate.
Amid the generally uncertain economic outlook, and faced with rising costs due to record-high oil prices, firms are reluctant to hire workers. This worsens consumer sentiment even further. The weak unemployment data also imply that the government’s labor and welfare reforms are not working well enough to turn around the labor market. Moreover, consumer confidence is still too low to bring about a reduction in unemployment, and a clear improvement is unlikely this year.
The German economy stands at a crossroads. With domestic demand too weak to offset falling export demand, the strength of third-quarter GDP growth seems to depend largely on investment growth—which is expected to come in weaker than its second-quarter increase of 0.5%.
