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Thursday, February 27, 2003

Germany is in Recession

Yesterdays figures leave little room for doubt. Germany entered recession during the last quarter 2002 - growth for the quarter was fractionally below zero, with the possibility of downward revision. Part of the reason the downside wasn't stronger was an inventory buildup in anticipation of a possible Iraq war. Y on Y inflation came in at 0.9%, so only fractionally out of deflationary territory now. Bad news all round. The only remaining questions are how deep, and how long. After months of pontificating, I fear they are now, finally, catching the Japanese illness.

While overall GDP growth was a notch above market expectations, at a reading of -0.0%Q, GDP went into negative territory at the end of last year. Final domestic demand slowed down slightly in Q4, coming almost to a standstill as consumer spending stagnated and government spending even contracted. At the same time investment spending, both capex and construction, surprisingly recovered during the quarter. Next to the upside surprise in investment spending, the main upside surprise amongst the components came from the volatile inventory component, which boosted overall GDP growth by 0.4 percent. Meanwhile net trade weighed heavily on growth, shaving half a point off overall GDP growth as export growth virtually came to a standstill and imports rose markedly.

The GDP deflator slowed down again in Q4, rising 0.1%Q after a 0.3%Q increase in Q3. This takes the annual rate down from 2.0%Y to 0.9%Y. Unit labour costs rose at a steady rate of 0.3%Q during the final quarter of last year. Gross operating margins thus narrowed in Q4, after having remained stable previously. Meanwhile the gross operating surplus fell 0.4%Q in Q4, after an impressive rise of 1.2%Q in Q3 and a massive 7.0%Q rebound in Q2. The decline in the German gross operating surplus suggests that corporate profits have likely weakened in Euroland over the winter as the economy slowed down markedly.

For the year as a whole this would leave us with our new downwardly revised a full-year growth rate of 0.0% -- it could be a 'black zero', could be a red one -- which would mark a further slowdown from the meager 0.2% recorded last year. Only in the second half of this year, do we expect a noticeable pickup in economic activity in Germany on the back of abating geopolitical uncertainties, falling oil prices and aggressive ECB rate cuts.
Source: Morgan Stanley Global Economic Forum

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