Print

Mail

wiki links

Germany edges near zero growth

More bad economic news on Friday highlighted how Germany's sluggish economy is flirting with recession, as a key index of business sentiment posted its biggest drop in 28 years.

The Ifo Institute's index, based on a survey of executives at 7,000 companies, fell to 85 in September from 89.5 in August. That was the biggest drop in a single month since the Arab oil embargo of 1973 and left the index at its lowest level in almost eight years.

The announcement came a day after the German government slashed its 2001 growth forecast to a paltry 0.75 percent, more evidence that Europe's biggest economy is stalling. The Ifo index, an indicator of likely business activity in the next few months, suggests a recovery is not in sight.

"It's a very bad number," said Ulrich Beckmann, an economist at Deutsche Bank, Germany's largest. The economy will be "dangerously close to negative growth" in the fourth quarter and in early 2002, he said.

``With some luck we can avoid a recession,'' he said. A recession is usually defined as two consecutive quarters of falling gross domestic product.

The euro dropped to US$0.8982 against the US dollar when the report was released, from US$0.9030 earlier. The DAX index of German blue-chip stocks was down 1.75 percent by early evening in Frankfurt trading.

Germany's economy has slowed sharply after expanding 3 percent last year, forcing the government to abandon key election pledges and increasing pressure on the European Central Bank to cut interest rates in the 12 countries using the euro.

Days after the Sept. 11 terror attacks in the US depressed the already gloomy outlook for the world economy, the ECB made a dramatic half-percentage point cut coordinated with the US Federal Reserve.

A statement by European Union leaders meeting in Belgium Friday said lower inflation would give the bank further "room for maneuver" to shore up growth. The bank's policy council meets again on Thursday next week.

Economists watch the Ifo survey closely for clues on how managers are likely to view spending on new purchases, facilities and workers that could stimulate the economy.

Ifo economist Gernot Nerb said the September results did not yet signal a recession, and may have been exaggerated by the psychological effect of the terror attacks. Three months of numbers are needed to determine a trend, he said. But earlier hopes of a quick recovery have dimmed. "The main message is, we do not see what we expected, a turning point right in front of us," he said.

Before the Sept. 11 attacks, there had been some indications that business confidence was holding up in Germany. Ifo's business sentiment index rose in July and fell only slightly in August.

But the latest drop was the sharpest since a 7.4-point fall in November 1973, the month after an Arab-Israeli war. Sentiment rebounded quickly after that, and Nerb suggested that might happen now.

The German government is now expecting growth of between 1 and 1.5 percent next year, but Chancellor Gerhard Schroeder has conceded he won't meet his goal to cut unemployment to 3.5 million by next year's election. September unemployment was 3.74 million or 9 percent.

The slowdown has intensified demands from business leaders and opposition conservatives for emergency measures to prop up the economy.

Schroeder has rejected their calls for tax cuts and moves to liberalize labor markets, but his government on Friday announced a plan to spend 3.6 billion euros (US$3.2 billion) on road building.
This story has been viewed 1946 times.