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Tuesday, October 14, 2003

Germany's Fragile 'Recovery'

As if to demonstrate that things concerning Germany are far from clear, this afternoon's news shows that confidence is not as high as expected. This extremely complicated picture is going to need time to see really what is happening.

A key measure of German economic confidence has fallen for the first time in 10 months. The ZEW index, which polls analysts and financial market participants for their views of how the economy will develop, ticked down to 60.3 points from the September level of 60.9. Economists said the surging euro was the main reason for the fall. "The stronger euro has made people question their level of confidence about the upswing," said Ralph Solveen at Commerzbank in Frankfurt. ZEW, the Mannheim-based research institute that compiles the index, also blamed confused economic data for the change in sentiment. "The latest economic data for Germany is incoherent. On the one hand, industrial production fell dramatically in August, yet contract volumes started growing again." Until the October slip, the ZEW index had been climbing since it bottomed at close to zero at the end of last year. Economists are now geared up for the results of the Ifo index, due later this month, which is seen as a more important measure of business confidence because it polls companies themselves. "If that falls, too, that would really be bad news," said Mr Solveen. Until now, both confidence indices have remained blindly bullish this year, despite worsening underlying economic data.
Source: Financial Times

At the same time ECB council member Ernst Welteke has said that the German economy emerged out of recession in the third quarter:

European Central Bank council member Ernst Welteke said the German economy, Europe's largest, emerged from its second recession in two years in the third quarter. Gross domestic product expanded about 0.2 percent compared with the second quarter, after the economy contracted in the first half, Welteke said in an interview with Bloomberg News, the first senior German official to give a quarterly estimate. "We will now see the recovery, even if it's a moderate one,'' said Welteke, who heads Germany's Bundesbank. A German revival means the $8 trillion economy of the dozen euro nations may also resume growth after shrinking in the second quarter. The French economy, Europe's third-largest, probably expanded 0.3 percent in the three months through September, speeding up to 0.5 percent this quarter, the Bank of France said today.

Germany's recovery may not be smooth. Investor confidence slipped in October, snapping the longest period of straight gains in a decade. An index measuring investors' economic growth expectations fell to 60.3 from 60.9 in September, said the ZEW Center for European Economic Research in Mannheim today. Germany's DAX Index was 15.92 points lower today at 3522.47 points at 12:07 p.m. in Frankfurt. The benchmark has surged 60 percent since touching a seven-year low in March. Germany's economy will continue a ``fragile'' revival in 2004, as exports increase, companies boost investment and consumer spending rises, the BDB banking association, whose 248 members includes Deutsche Bank AG and Commerzbank AG, said today.
Source: Bloomberg

Meantime, part of the backdrop to whjat happens next will undoubtedly be decided in the political arena:

Germany is preparing for an unprecedented amount of legislative activity in the remainder of this year. What is likely to be the largest number of legislative initiatives in post-World War II history clearly reflects the government’s ambitions to push through with substantial labour market and welfare reforms (see also: Three Cheers to the Chancellor, July 22, 2003). Political observers are counting down to what is widely seen as a red-letter day on this Friday, October 17, when the lower house of parliament, the Bundestag, will debate and vote on several important reform proposals. These proposals include introducing further labour market reforms, pulling forward income tax cuts worth €15.6 billion to 2004 and overhauling the so-called trade tax, a quasi tax of around 14-16% on corporate profits charged by local municipalities. In my opinion, the Bundestag’s vote this Friday will merely mark the start of what should become a red-hot autumn in German politics. If Chancellor Schroeder’s push for reform fails, I believe we could see a major power struggle within the both government’s and the opposition’s rank and file. Independent of the political fallout from such a power struggle, the economic outcome will likely be even bolder structural reforms than the ones Chancellor Schroeder is pushing for at the moment.
Source: Elga Bartsch, Morgan Stanley Global Economic Forum

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