Prospects for the German economy within a slowing euro-zone are being assessed with increasing concern. The official forecast of 2.6-2.8% economic growth this year has been acknowledged by chancellor Gerhard Schröder as being hard to reach. Now the nation’s leading economic institutes have revised their view on growth prospects sharply downwards.

The institutes cut their forecast for GDP growth in 2001 to 2.1% from their prediction last autumn of 2.7%, but an increase to 2.2% is expected in 2002. Nonetheless, unemployment is forecast to continue falling, albeit at a slower pace. The number of jobless is set to decline to 3.6 million by the end of the year and to 3.4 million by the end of 2002.

Earlier, Germany’s leading commercial banks cut their growth forecast to 2.25% from 2.5-2.75%, while the Kiel-based Institute of World Economics slashed its forecast to 2.1% from 2.4%.

The reasons cited for the slowdown are largely external: the downturn in the US and the weakening rate of euro-zone expansion. Exports will continue to contribute towards growth but, with the US Germany’s second largest overseas market after France, the continuing economic deterioration there is certain to impact on growth. In 2000, 10.3% of total German exports went to the US.

UK imports

The UK ranks as the third largest destination for German exports and is the fifth largest overseas supplier. In 2000, export sales to the UK amounted to £27.5bn, while imports from the UK totalled £21.9bn. German shipments of timber to Britain increased by 2% on the year, to £23m. Exports of furniture were worth £198.5m, up 12% on the 1999 level, while UK imports of other wooden products from Germany were worth £120.6m last year – an annual rise of 36%. The value of British timber sales to Germany in 2000, however, slipped by 61% on the year, to just £1.3m. Furniture imports from the UK were up by 9%, to £109.2m, but the value of other timber product imports fell by 37% to £19.4m.

At home, the economy is starting to benefit from the government’s tax reform programme, to be phased in by 2005, which will provide private households and companies with massive tax relief amounting to around DM45bn (1.1% of GDP).

Net wages and salaries will soar 4.8% in the current year, say the economic institutes, well above the 3.1% increase produced by the massive tax relief. Consequently, private consumption is expected to pick up over the remainder of the year, with consumer prices remaining relatively stable. Investment in plant and machinery is projected to increase by 5.9% this year and by 6.5% next year.

A barrage of worrying leading economic indicators is feeding much of the present gloom. The purchasing managers’ index fell for the ninth consecutive month in March and the Munich-based Ifo institute’s business climate index of trade and industry in western Germany deteriorated sharply in February.

Recession evasion

In its latest economic review, Commerzbank points out that the Ifo indicators have been falling since early last summer, but argues that although they do not reveal any upturn in demand over the coming months, ‘the economic outlook is unlikely to grow any gloomier [and] we do not envisage them suggesting the threat of a recession’.

Certainly no-one is predicting recession, but annual growth of around 2% is a far cry from the 4.4% achieved in the first half of last year, before the expansion spluttered in the second half to just 1%. Admittedly the economy grew by 3% overall last year, its best performance since re-unification – but, Italy apart, all the countries in the 12-nation euro-zone did better.

So what is holding Germany back? One answer is that it is solely the short-term economic problems of the US, Japan and other world markets. But some analysts believe the problems lie deeper. Business Week recently observed that the issues relate to Germany’s ‘coddled workers, maybe even to a risk-averse culture’. Furthermore, there is concern over concessions made by the centre-left government of Mr Schröder, such as the new law which extends worker power to influence corporate policy at a time when the workforce needs to be more flexible, not less.

Unemployment

‘There is even a fear,’ asserts Business Week, ‘that the maj-ority of Germans don’t really want US-style fast growth.’ But, it adds, most economists believe that only sustained growth of at least 3% can continue to cut unemployment. The latest data shows that the jobless numbers jumped by a seasonally adjusted 12,000 in March, as the eco-nomy weakened.

In January, unemployment rose to 9.3% of the workforce, as the construction industry laid off workers, especially in east Germany, and rose again during February. The industry benefited from exceptionally mild weather in November and December, says Deutsche Bundesbank. Taking December and January together, year-on-year construction output fell by 2.75%.

Social reforms

With a general election due next year there is some evidence that Mr Schröder’s Social Democrat party is avoiding reform that might sap its support among trade unionists and other left-leaning voters. Indeed, it has withdrawn some measures passed by the previous administration, such as a reduction in statutory sick pay and the easing of restrictions on firing workers by small firms. In addition, it has introduced new social security contributions on low-wage jobs and tightened restrictions on the self-employed and on part-time work.

Thomas Mayer, chief economist of Goldman Sachs in Frankfurt, said recently: ‘We fear that the lack of further market-oriented reform – and the partial re-regulation of the economy – will cause a loss of investment and hence of job and economic growth’. For Germany and for other euro-zone countries, a renewed commitment to economic reform cannot come soon enough.