Germany's 'wise men' seeeconomy facing slowdown

17th November 2004, Comments 0 comments

17 November 2004, BERLIN - Germany's Council of Economic Advisers predicted on Wednesday that the nation's growth rate will slip back to 1.4 percent next year with high oil prices and a strong euro casting a shadow over the outlook for Europe's biggest economy. Known as the "five wise men", the council, which presented its report to Chancellor Gerhard Schroeder on Wednesday, also painted a very bleak picture for the German job market with unemployment expected to remain stuck at 10.5 percent next year and

17 November 2004

BERLIN - Germany's Council of Economic Advisers predicted on Wednesday that the nation's growth rate will slip back to 1.4 percent next year with high oil prices and a strong euro casting a shadow over the outlook for Europe's biggest economy.

Known as the "five wise men", the council, which presented its report to Chancellor Gerhard Schroeder on Wednesday, also painted a very bleak picture for the German job market with unemployment expected to remain stuck at 10.5 percent next year and projected a slide in export growth.

The council's 2005 growth forecast is also more pessimistic than the 1.7 percent projected by the government. Both the government and the council expect German growth this year to come in at a moderate 1.8 percent.

The five-member council sees a gradual pick-up of domestic demand next year with the global economy underpinning Germany's foreign orders.

But the government advisers warned that the main risks for Germany's economic prospects resulted "from a possible further strengthening of the euro and an increase in oil prices."

Council head Wolfgang Wiegard, however, ruled out Germany slumping back into stagnation, telling reporters that the slower 2005 growth forecast did not mean a downswing.

With Germany having emerged last year as the world's leading export nation, Schroeder said when receiving the report that while the country had turned in a good performance in trade, a weak domestic economy meant that "we still have some more work to do."

The five wise men see private consumption growing by a meagre 0.7 percent in 2005 after stagnating this year with overall domestic demand growing at 0.8 percent in 2005 after 0.2 percent this year.

But while oil prices have edged down in recent days, the euro has continued to rise with the common currency hitting a new record high of over USD 1.3030 on Wednesday.

The council's comments about the euro follows a string of remarks by leading European officials as concerns have grown about the impact of the strong common currency on the 12-member eurozone's export machine.

"Everybody is concerned with the euro-dollar exchange rate and the impact ... on exports," Schroeder told business leaders in Berlin Tuesday. Up until now exports have been the key driving force behind both German and eurozone growth.

European Central Bank chief Jean-Claude Trichet has also raised the alarm about the current swings on the currency market and the euro's sharp upward shift against the dollar, describing them as "brutal" and "unwelcome".

The result is that the dollar's corresponding weakness against the euro is expected to be a major theme at the weekend meeting in Berlin of the Group of 20 rich and emerging economies.

Amid signs of a slowing international economy, the council predicts that the rate of growth of exports will also ease up next year.

After growing at 10.3 percent in 2004, export growth is forecast to come in at 5.9 percent next year. Imports are also tipped to roll back from 6.8 percent this year to 5.1 percent in 2005.

The council also points to the lower number of working days in Germany next year as contributing to the slower economic growth with 1.3 less working days in 2005 compared to 2004.

Schroeder has already fired up a public debate about the need for the country to consider dropping a public holiday marking German unification by moving it to a Sunday.

"Lower growth next year is not because of slower growth," Schroeder told the council members when receiving the report, "but rather due to fewer working days."

With a batch of key economic indicators having already pointed to the German economy losing momentum as it enters the new year, private economists have started revising down their 2005 growth rates for the country.

The International Monetary Fund (IMF) has also downgraded German growth estimates in 2005 from 1.8 to 1.5 percent and this year from two to 1.8 percent.

Equally worrying are the council's projections that unemployment in Germany could hit five million during the coming winter months, partly as a result of the government's tough labour market reforms which are to be introduced in January.

"Nobody can be satisfied with this," said Schroeder about the prospects for the country's unemployment rate.

Slowing growth also means that in 2005 Germany will miss the tough three per cent budget target for euro member states for the fourth year in a row with the council projecting a budget deficit next year of 3.5 percent.

The council also believes that Germany's public finances are in a critical state and called on Berlin to ensue that meeting the eurozone's fiscal rules was a key priority of its fiscal policy.

Schroeder conceded, however, that meeting the three percent target will be difficult.

DPA

Subject: German news 

0 Comments To This Article