German Economic Outlook a Mixed Bag

As the year comes to an end, Germans are hoping they'll be able to put what's been an economic 'annus horribilis' behind them. Europe's leading economic power found the going in 2002 especially tough. After the relatively smooth introduction of the euro as legal tender on Jan. 1, 2002, the economy took a slow and determined dive from which it has yet to surface.

With the global economic forecast for 2003 looking slightly better, Germany is hoping to feel the effects of a faster US-led recovery in the coming year. But there still no firm indications that growth will be solid, and many people believe Europe will be lucky to see any sort of rebound.

Pessimism

The prognoses for the Germany economy in the coming year are mostly negative. Some studies suggest business confidence is at a 10-year low. The director of the German Economic Institute, Gerhard Fels, says a survey of 44 employer organizations has shown that most businesses predict zero- or negative growth in the areas of turnover, investment and employment. And industry leaders are pointing their fingers at the government's soft approach to the unions, says Fels.

Germany's retail sector is reeling after poor Christmas sales. Shops have dropped their prices dramatically this week, desparate to move stock "at practically any price," says the head of the retailers' association Handelsverband BAG, Johann Hellwege.

Even as prices drop, budget cuts are expected to start to bite in the coming months, and that means Germans will have less money in their pockets to spend. This is not good news for the country's economic prospects. Unless consumer demand increases, businesses will not be able to invest, and the brakes will be applied once more.

Fuel, meanwhile, has already become more expensive,as a result of the threat of war in the Middle East, which has led OPEC to curb oil production, and strikes in Venezuela. Germany's biggest fuel company, Aral/BP, is charging 1.05 euro ($1.10) per liter for gas, and a new environment tax to be introduced on the first of January will send the price up by a further 3 to 5 cents.

Unemployment rising

The economic outlook for 2003 looks bleakest of all in Germany's eastern states. Unemployment, much higher than in the west, is at best expected to bottom out in the coming year. Economists have warned against drawing false conclusions from the higher growth forecasts in the east, which is still recovering from the devastating effects of the floods in 2002.

In the country as a whole, the number of people out of work shot up to 4.22 million in December, the highest level in five years. Blaming seasonal factors and the long-term ill health of the economy, the government now forecasts a rise in the number of people without jobs to more than 4.5 million in February.

The latest forecast comes less than a week after the Economy and Labor Minister Wolfgang Clement said he was confident unemployment would fall below 4 million in 2003.

Growth forecast unrealistic

Even if the pressure on Europe's economies eases slightly in 2003, the change will not be dramatic. Experts are predicting the euro zone to expand by only 1.3 percent.

The German government has forecast 1.5 percent growth in 2003. But the European Commission believes this is too optimistic. It expects the euro zone's leading economy to expand by no more than one percent next year.

This will mean the government won't be able to bring down its budget deficit below 3 percent of gross domestic product as required by the European Stability and Growth Pact, which ensures the stability of the euro.

Seeing the brighter side

Despite the gloomy forecasts, optimists are also making their voices heard. The president of the German parliament, Wolfgang Thierse, on Friday called for the doomsday predictions to stop. Indeed, official figures for 2002 show Germany's economy stabilizing, after reaching its lowest point in the first quarter of the year. That's led some financial experts to predict improvement in the coming year, citing growing business confidence and expectations of the benefits to flow from the government's labor reforms.

"The economy is looking to the future with more confidence," financial consultant Roland Berger told Germany's Bild newspaper. "As long as industry is optimistic about the future, then we'll start to see more investment and we'll be creating more jobs," said Berger.

That's backed up by figures which show that 38 percent of companies are expecting next year to be an improvement on 2002, and a further 35 percent think the economic situation won't get worse.

"We're not hearing any whining," says Mario Ohoven, president of the German Small Business Association.