Recovery takes shape

10th June 2004, Comments 0 comments

The German economy rarely surprises on the upside. But Andrew McCathie argues that the long period of gloom that descended on Europe's biggest economy three years ago appears to be finally starting to lift.

Three years of economic stagnation appear to be drawing to an end in Germany with a raft of key indicators pointing to the recovery of Europe's biggest economy beginning to gather strength.

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German exports are powering the rebound

But while leading economic sentiment surveys and crucial factory order book and production data as well as exports have underscored confidence that Germany has at last embarked on an upswing, the scale of the pickup still appears to fall short of what's needed to help roll back record high unemployment levels.

Official data released Tuesday showed Germany's seasonally adjusted jobless figures rising by 9,000 in May, as employers held back from hiring and instead focused on cutting costs in the wake of the euro's surge earlier this year and the more recent jump in oil prices.

Although the May increase was less than economists' forecasts, German unemployment remains above 10 percent, with the federal labour office data also showing employment in the country slumping by 33,000 in March. This was the biggest drop in more than a year and followed a 22,000 fall in February.

Tuesday's data did contain some positive news, with the number of job openings increasing by 3,000 in May - the first rise in vacancies since the middle of last year.

However, economists are not expecting much improvement in the coming months with the German economy tipped to grow this year by a modest 1.5 percent, below the 2 percent mark that many analysts believe is necessary to create jobs.

"The May numbers confirm once again that the improvement in market conditions has not yet reached the job market," said Ralph Solveen, economist with Commerzbank AG.

*quote1*The job data came only days after figures showed German factory orders surging by a better-than-expected 2.5 percent in April, with production up 2.2 percent in the same month, double what economists had forecast.

German exports rocketed up by 15.7 percent year-on-year in April with the nation's first-quarter growth coming in at 0.4 percent. This was the strongest quarterly growth for the nation, which is also the world's third biggest economy, since the first quarter of 2001.

But first-quarter growth in the world's top two economies - the US and Japan - was more than double the rate recorded in Germany.

Also hanging over the German economy are concerns about effects from soaring energy prices. Signs that high fuel costs were already feeding through to inflation appear to have led to a shift towards a more hawkish stance at the European Central Bank, as it begins to prepare the ground for a monetary tightening.

While many analysts have forecast that the Bank of England - Europe's other key central bank - could raise its benchmark interest rate by 25 basis points as early as its Thursday meeting, they believe the ECB will hold fire until later in the year so as not to risk derailing the recovery. The ECB's benchmark refinancing rate currently stands at a post-Second World War low of 2 percent.

*quote2*Meanwhile, data released by Germany's VDA automotive industry association shows the threat posed to the eurozone's upswing by rising energy costs. The figures showed new car registrations slumping by 8 percent in May, compared to the same month last year, as soaring oil prices and new taxes led to car buyers shying away from showrooms.

The fall followed two consecutive monthly rises in car registrations, which represent a key part of domestic demand in Germany.

With German inflation jumping to two percent in May compared to 1.6 percent in April, economists are now concerned that high energy prices could hit household consumption just as Germany's consumers were showing signs of stirring after a long dormant period.

In the meantime, however, retail sales in the country recorded the first rise in six months in April, rising by a better-than-expected 2.5 percent month-on-month.

This has raised hopes that despite continuing consumer concerns about high unemployment and moves to wind back Germany's welfare state, private consumption might soon help to provide for a more broad-based recovery, which up until recently has been almost solely fuelled by Germany's export machine.

June 2004
 [Copyright Expatica News 2004]

Subject: German news, economy, exports, inflation, European Central Bank

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