Fri, Oct 17, 2003 - Page 9 News List

There's life in Germany's economy yet, despite bland forecasts


Germany has entered the fourth quarter of this year with a raft of data pointing to Europe's biggest economy starting to emerge from three years of gloom.

While consumer and investor confidence continues to edge higher, business confidence in the nation rose for the fifth consecutive month in September. A steady stream of solid results from key economic indicators -- including factory orders, retail sales car sales and trade -- has raised hopes that Germany is finally on course to a recovery.

Yet, economists believe that the German economy will be lucky to climb back to zero growth this year on a sluggish recovery toward the end of the year after slumping into recession during the first half of the year. Forecasts are for a modest 1.4 percent rate of growth next year.

The recent cluster of hard economic data is starting to raise expectations that the worst is now over for the German economy, and that the nation may have turned in a better-than-expected economic performance during the third quarter.

Moreover, the stream of figures is also an indication that the nation's hard economic data is now starting to catch up with economic sentiment reports that have been pointing for some months to an upswing in Germany.

Even the recent dramatic slide in Germany's labor market appears to be bottoming out, with data released last week showing that joblessness in September edged down to 10.1 percent from 10.7 percent in August. Employment is usually a lagging economic indicator.

"While we see no turnaround yet [in unemployment], there are the first tentative signs that the negative cyclical influences on the labor market started to ease in recent months," said Manuela Preuschl, economist with Deutsche Bank AG.

The unexpected fall in Germany's high unemployment follows the introduction by Chancellor Gerhard Schroeder's Social Democrat-led leftwing coalition of a package of reforms to streamline management of the government's labor office, encourage workers to take low-paid jobs and offer subsidies to help unemployed people set up small businesses.

The pickup in the labor market and brighter prospects for the economy help to ease some of the political pressure on Schroeder -- especially from leftwing critics in his own Social Democratic Party -- as he pushes forward with a rigorous agenda of economic and social welfare reforms.

Still hanging over the German economic outlook is the rising value of the euro, which has climbed by about 7 percent over the past month and just days ago appeared to be heading toward its all-time high of US$1.193.

Although the euro retreated late in the week, its rapid rise has fuelled fears that a strong currency could throw a wrench into the 12-member eurozone's export machine, which has emerged as one of the key pillars of growth in the countries using the common currency.

Concerns about the impact of a stronger euro are a sign of the fragile state of Germany's economy.

Some currency analysts expect the euro to hit US$1.2 by the end of the year, and longer-term currency forecasts suggest an exchange rate of US$1.3 within 12 months. German business groups have warned that an exchange rate "significantly above" US$1.2 would be a blow to exporters.

Meanwhile, data showing a rebound in imports as well as better-than-expected figures for both exports and factory orders have added to mounting evidence that a recovery is slowly gaining momentum in Germany.

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