Germany's opposition-controlled upper house of parliament's decision Friday to delay Chancellor Gerhard Schroeder's key tax and job reforms comes as signs emerge that the nation's economy has begun to kick back into life.
After slumping into recession during the first half of the year, official data due out this week is forecast to show Europe's biggest economy as having turned the corner during the third quarter and consequently bringing to an end a three-year economic slump in the nation.
Evidence that the country's economy is back on a growth path is likely to ease the pressure on Schroeder as he battles to push forward with his ambitious and deeply unpopular reform plans.
A crop of data released in recent weeks has pointed to Europe's biggest economy ending the year on a positive note and as a result giving Schroeder something of a boost as he attempts to convince a wary electorate that trimming welfare benefits and relaxing strict labor market rules will help to shore up growth.
But as output data released Friday demonstrated Germany's economic rebound should not be taken for granted with production in the country recording a surprise fall in September of 1.2 percent.
It was the second consecutive monthly fall in German output with analysts having forecast a 2 percent increase in September. In releasing the data, the Ministry of Labor and Economics said summer holidays during the month had hit production.
Indeed, while describing the production figures as disappointing, Ralph Solveen, economist with Germany's Commerzbank said he could not rule out that the data would be revised up to a small plus in the second assessment of the figures which is due out later in the month.
Solveen stuck to his assessment that economic activity in the fourth quarter would brighten further.
Furthermore, economists are predicting that official growth data due out Thursday will show the German economy as having expanded by about 0.2 percent quarter-on-quarter during the third quarter. This follows two quarters of negative growth in Germany.
In addition, the latest production data followed the release of a batch of figures last week indicating that German factory orders expanded at a faster than forecast 0.9 percent in September and that Schroeder's labour market reforms were starting to bite and helping to wind back unemployment numbers.
In seasonally adjusted terms, German unemployment declined by a bigger-than-expected 12,000 last month to record its second consecutive monthly fall.
As a sign of the changes unleashed by the government's labour market reforms, figures also released last week showed that since April more than a million low paid so-called mini-jobs, which pay up to 400 euros (US$457) a month and are exempt from social insurance contributions, have been created.
More importantly, the raft of positive data is further confirmation that the hard economic data is now catching up with the steady stream of upbeat economic sentiment surveys for the country that earlier in the year began pointing to a pickup by the end of the year.
The release of the data came as further signs emerged of the battle ahead for Schroeder in bringing into law key elements of his economic reform agenda with the opposition-controlled upper house of the German parliament (Bundesrat) effectively delaying the introduction of legislation for planned tax cuts totalling 15.6 billion euros (US$17.8 billion) and reductions in unemployment benefits.
Schroeder's plans are now to be considered by a special parliamentary mediation committee with the government hoping that business pressure on the Christian Democrat-led conservative opposition to allow the reforms to proceed will mean that a compromise will be found so as to allow the legislation to be introduced before Christmas.
In particular, the opposition is critical of the way that the government plans to finance the tax cuts through raising borrowings and cutting tax breaks for homeowners and commuters.
With analysts now expecting that interest rates are likely to remain at their current post-World War II level well into the new year, economists believe that the tax cuts will represent a big fiscal boost to the country by encouraging consumers to spend.
But overhanging the current somewhat promising outlook are concerns that the euro, which has gained more than 13 percent against the US dollar over the past 12 months, could rebound ahead earlier next year as worries again set in about the US's so-called two deficits.
In May, the common currency surged to an all-time high of US$1.1932, which many analysts believe hit exports and helped to dampen growth in both Germany and its partners in the 12-member eurozone.
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