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Friday, March 28, 2003

German Growth Forecasts 2003

How much will the Germany economy grow in 2003? The intelligent answer, I suppose, really should be that this is a fools' question, and the answer is anyone's guess. That of course is not the position adopted by the German government who, if the reports are correct, are busy debating whether to drop the anticipated growth forecast from its current 1% to the 0.25% - 0.5% range, or to make only a more 'moderate' reduction. And how many camels can you balance on the end of a needle you may well ask? My own view is all of this is full of plenty of downside risk. I wouldn't want to stick my neck out too far yet, but negative growth 2003 in Germany would not surprise me at all. Of course I don't have all those fancy government models to play around with (but then neither do I have to convince anyone that I'm staying within a 3% deficit limit), so this is based pretty much on looking at the information coming in, especially the February figures, and applying my 'animal instincts'.

The German government will next month bow to the harsher economic climate caused by the war in Iraq and slash its growth forecast for this year. The size of the cut from the 1 per cent estimate for gross domestic product growth remains unclear, amid a stand-off between senior ministers. Hans Eichel, the finance minister, favours a sharp reduction to between 0.25 per cent and 0.5 per cent. By contrast, officials say Wolfgang Clement, the economics and labour minister, prefers a smaller cut to avoid weakening already shaky business confidence. Either way, 1 per cent has appeared increasingly untenable in the light of much less optimistic predictions from Germany's six leading economic institutes, and private sector economists, some of whom expect growth to be little better than last year's 0.2 per cent.

A formal revision had been expected by May, when a specialist government tax forecasting panel produces its latest report. But officials said the announcement would be brought forward in view of forthcoming, separate reassessments of the economy by the institutes, the International Monetary Fund and the Organisation for Economic Co-operation and Development.The revision will have repercussions for this year's budget and Germany's expectation of holding the deficit below the 3 per cent ceiling set out in the rules for the euro.Mr Eichel has said he expected the budget deficit to be 2.85 per cent of GDP this year, but warned that matters could deteriorate through unforeseen circumstances, such as prolonged economic instability because of Iraq.

Economists, who had already said the figure was optimistic, added that new spending measures announced this month made it inevitable that Germany would exceed 3 per cent of GDP for a second year running. In 2002, the deficit was 3.6 per cent of GDP.The new growth forecast would mark the second downward revision in two months after the government cut its former 1.5 per cent estimate to 1 per cent in January. Growth of just 0.5 per cent would mean tax revenues alone would be about €2bn ($2.14bn, £1.35bn) below expectations. Official figures for January and February showed revenues had already fallen 5.9 per cent below last year's already weak level. Lower growth would also have ominous implications for government spending, already subject to some bold assumptions this year. The government's aim - questioned by many economists - to eliminate subsidies to the Federal Labour Agency, responsible for unemployment benefit, would appear more doubtful than ever. Forecasts for pensions would also have to be revised, all leading to a likely rise in borrowing.
Source: Financial Times

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