Research Dept. News
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Monthly Report, num 328 - October 2009
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European Union - Germany
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Germany hoping for recovery to consolidate
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Private consumption and foreign sector become main engines driving German economy in second quarter.
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Germany faced its general elections last month in the knowledge that it was one of the first European economies to come out of the recession with GDP growth of 0.3% in the second quarter compared with the previous quarter. This unexpected recovery was the result of the positive contribution of all components of the gross domestic product (GDP) except the change in inventories. Of special note were private consumption and the foreign sector with contributions of 0.4% and 1.7% respectively. In view of this improvement, the main economic institutes have revised their forecasts by close to one percentage point, putting the year-on-year drop in the German economy between 5.0% and 5.5% in 2009. This figure means that the economy will maintain its gradual growth rate over coming quarters.
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The most frequent indicators available for the third quarter of 2009, both for supply and demand, confirm this trend. There was notable growth of retail sales at 5.8% month-on-month in July. The main reasons for the recovery in consumption were the low inflation rate and the fiscal stimulus measures applied by the government aimed at increasing disposable income of households. Furthermore, foreign demand continues to recover with growth of exports in July at 2.3% compared with the month before thus making this the third consecutive increase and reducing the year-on-year drop in exports in July to 18.8%.
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Economic growth forecasts revised upward.
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As a result of this increase in demand, both domestic and foreign, industrial orders again rose in July ending up far from the lows seen in February. Industrial production that month was down 0.9% compared with the month before thus reflecting the process of adapting inventories to the new economic situation. Nevertheless, the rise in orders and the low level of current inventories makes it possible to foresee an increase in industrial production in coming months with a subsequent increase in utilization of production capacity after going to very low levels in the second quarter of 2009.
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Supply and demand indicators point to continued GDP growth in third quarter...
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The trend in confidence indices, both for consumers and business executives, reflects this recovery. As may be seen in the graph, these indicators have not stopped rising since the low reached between February and March 2009. What is more, in both cases the future components of these statistical series anticipate further increases that will keep leaving behind the all-time lows they are still showing. In spite of the clear signs of improvement in the German economy, there are certain risks that could interrupt the return to a growth path, especially in 2010.
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...which could be interrupted by uncertainty in labour market and exports.
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First of all, the end of the financial stimuli in some of its main trading partners could have a negative effect on German exports. On the other hand, while the economic recession has only slightly affected the unemployment rate which is holding at close to the lows reached in 2008, the hours worked per employee have been drastically reduced thus pointing to a sharply worse situation in the labour market. The stagnation in this market and the ending of programmes for temporary reduction of work suggest there could be an increase in the unemployment rate in 2010 putting it above 10%. This would have a negative effect on private household consumption, one of the components currently driving the German economy.
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Furthermore, the automatic stabilizers and fiscal stimulus programmes have affected the state of the public finances in 2009 and it is expected this will continue in 2010. According to the government’s Fiscal Reconciliation Programme, the government deficit will then stand above 6%, raising the public debt to 80%, both being figures well above the limits established under the Treaty of Maastricht.
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New government must face delicate economic situation.
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The new German government will therefore face a difficult task during its mandate. It will have to stimulate the economy, particularly private consumption, in order to avoid stagnation and its dependence on the foreign sector. Furthermore, good management of the public accounts will be needed, especially through containment of spending, once the economy begins to show signs of consolidating. The latter task will be made more difficult if electoral promises of higher spending on education and social improvements are kept.
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