Germany in recession (FT.com)

Germany in recession
Published: November 13 2008 09:42 | Last updated: November 13 2008 20:29

Germany’s recession is now official after a 0.5 per cent fall in third quarter gross domestic product. This was worse than expected. The real shock was how badly exports have been hit as demand slumps worldwide. Export growth, which was powering ahead strongly, could come to a complete halt next year.

Thursday’s data offered up one bit of positive news – a small increase in consumer spending. But this looks unsustainable. True, German consumers have more to fall back on compared with their more profligate counterparts in the UK and the US: the savings rate in Germany has actually been increasing. Furthermore, the labour market has continued to improve, which has helped to strengthen disposable incomes. But that will not last. The employment outlook is bleak. Bank of America forecasts a 500,000 increase in the number of unemployed next year. Consumers fearful of job loss are unlikely to open their wallets, even if they have no pressing need to rebuild tattered finances.

Such dire numbers, especially if echoed across the rest of Europe, now make interest rate cuts from the European Central Bank more than likely. A 50 basis points cut in December from the current 3.25 per cent looks in the bag and most expect rates to come down to 2 per cent early next year. Less certain is whether the German government will feel the need to do more on the fiscal front. It has already conceded with one package but shows little appetite to do more.

Employers will urge workers to do their bit to improve their chances in a tough job market by embracing wage restraint – Germany’s largest trade union has just moderated its pay demands. That might temper, but not significantly offset, the damage from a global slowdown. Of course, when the cycle turns again, German households and companies will be relatively well-placed. Right now, that is cold comfort.

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