Thursday, October 9, 2014

Germany: Berlin Potentially Facing a Recession

According to The Associated Press, the drumbeat of bad economic news for Germany continued Thursday (October 9), with the biggest monthly plunge in exports in five years raising the risk that Europe's largest economy might slide into recession.
The figures follow a string of disappointing news--including sharp declines in industrial production, factory orders and business confidence--that analyst ING economist Carsten Brzeski called "a summer horror story."
Exports fell in August by 5.8% over July, the sharpest drop since early 2009, when the global financial crisis was wreaking havoc on the world economy. Imports dropped as well, by 1.3% in calendar-and seasonally adjusted terms, the Federal Statistical Office said.
Unless the German economy rebounds strongly in September, there is now a chance it might contract in the third quarter. Following a 0.2% quarter-on-quarter contraction in the April-June period, that would technically put Germany in recession. "The economy seems to need a small miracle in September to avoid a recession," said Brzeski.
COMMENT: Germany is suffering from a drop in demand for its high-value exports in other European countries as well as in China. Businesses are also worried about the impact of the Ukrainian crisis, in particular the sanctions against Russia.
%View gallerThe downturn caused a group of four leading economic think tanks in Germany to slash their growth forecast for the country. They forecast growth of 1.3 percent this year and 1.2 percent in 2015, down from their prediction in April for growth rate of 1.9 percent and 2 percent respectively.
Chancellor Angela Merkel said the lower forecast didn't surprise the government, which has talked lately about the importance of encouraging more private investment but also is determined to stick to plans to get by without new public borrowing from next year.
Merkel said the government is "considering how additional investments could be possible, how bureaucracy can be removed, how to invest in the future in the digital and energy areas" and pledged to "proceed decisively in this regard."
There is some hope that German economic activity rebounded in September, helping the country dodge recession. The drop in indicators in August was due in part to the timing of summer holidays and indicates a recovery is possible in the last month of the third quarter.
In the longer term, however, the downturn suggests Germany will not be able to support the economy of the wider 18-country eurozone, which ran aground in the second quarter, registering no growth.
The European Central Bank has commenced a range of programs to encourage lending in the economy and support growth. Yet, the appetite for loans and investments is weak as businesses and households worry that the economy's future is uncertain.

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