Optimism grows about German economic outlook

8th December 2005, Comments 0 comments

8 December 2005, BERLIN - Germany's economy is continuing to haul itself out of a protracted period of stagnation with a slew of key new data released this week coming in higher than forecast and adding to signs that industrial nations have been shaking off high oil prices.

8 December 2005

BERLIN - Germany's economy is continuing to haul itself out of a protracted period of stagnation with a slew of key new data released this week coming in higher than forecast and adding to signs that industrial nations have been shaking off high oil prices.

Figures released Thursday by Germany's Economy and Technology Ministry showed industrial production in Europe's biggest economy growing by 1.1 per cent in October, which was more than double what analysts had forecast.

Year-on-year industrial production grew by a solid 3.8 per cent in October.

The publication of the production figures followed data showing a better-than-forecast two per cent jump in German order books in October as economists began revising up their growth projections for the country.

Indeed, the publication of the latest industrial production figures coincided with two of Germany's leading economic institutes raising their forecasts for the coming 12 months.

"We assume that the economic stimulation will continue in 2006," said Roland Doehrn, chief economist of the Essen-based RWI, which believes growth next year should come in at a modest 1.6 per cent instead of a previously forecast 1.4 per cent.

"The German economy is on the way to recovery," said the Kiel Institute for World Economics Thursday, adding that the upswing which has emerged during the second half of the year will accelerate at a faster pace in 2006 than previously expected.

The Kiel institute is expecting growth next year to edge up to 1.5 per cent. It had previously forecast a 1.1 per cent growth rate.

That said, however, Doehrn warned that high oil prices could still threaten to dampen growth.

But for the moment, he said, the signs are favourable and pointed to economic activity gaining strength as the year progresses and underpinned by Germany's global price competitiveness and a sustained pickup in investment.

Coming just one week after the European Central Bank delivered its first rate hike in more than five years, the latest batch of German economic data and reports also lends support to the ECB's argument that growth in the 12-member eurozone will gain ground next year.

The Frankfurt-based ECB last week raised its forecasts for eurozone growth this year to 1.4 per cent from 1.3 per cent and 1.9 per cent from 1.8 per cent for 2006.

Speaking to reporters at a conference in Frankfurt Thursday, ECB chief economist Otmar Issing echoed comments made a week ago by bank president Jean-Claude Trichet that last week's 25 basis-point increase in borrowing costs will not set the stage for a new round of rate hikes.

"The interest rate decision should not be seen as a step that will be automatically followed by other rate increases," said Issing.

However, he went on to insist that the ECB was ready to act at any time on monetary policy.

"If necessary, we will act, and we can act at any time," Issing said.

But despite the series of growth upgrades, Germany's economic expansion is unlikely to be strong enough to result in any dramatic change in the nation's hard-pressed labour market.

Most analysts believe that Germany needs a growth rate of at least two per cent before it can successfully start to wind back unemployment, which currently stands at 10.9 per cent.

More to the point, high unemployment, slow wage growth and this year's surge in oil prices has meant that private consumption remains the weak link in Germany's economic pickup.

But like many other economists, RWI's Doehrn is expecting the German government's plans to raise consumption tax by three percentage points in January 2007 to result in a boost to household spending next year as consumers bring forward purchases.

At the same time and despite growth gaining momentum, he expects Germany's budget deficit to come in at 3.2 per cent in 2006 and consequently again overshoot the three per cent target for euro member states.

DPA

Subject: German news

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