Schroeder’s prosperous New Year

After a year of fading growth, Germany’s economy could be heading for a surprisingly strong finish to 2004, with Chancellor Gerhard Schroeder hoping that a return to economic growth will help to convince voters of the necessity of his round of often tough and unpopular reforms.

Coupled with the economy’s less  than-sparkling performance earlier this year, the uncertainty created by the reforms to Germany’s once generous welfare state and to the country’s labour market have helped to send  Schroeder’s Social Democrat’s opinion poll rating plummeting to record lows.

But the government now appears to have turned the corner and is on the road to a political recovery, with signs of growing acceptance of the reforms and the Social Democrats gaining ground on the conservative-led opposition in voter surveys as the opposition has faltered on a string of key issues.

The pressure on opposition leader Angela Merkel has been compounded by the embarrassing rersignation of Laurenz Meyer, the General Secretary of the main opposition party, the Christian Democrats, after he admitted receiving payments from his former employer, a unit of energy giant RWE.

Indeed, setting the stage for an unexpectedly emphatic start to 2005, German business confidence recorded a surprise jump in December and rebounded to its highest level in eight months.

Despite concerns that high oil prices combined with a strong euro and slower global growth might set back Germany’s recovery from a protracted period of stagnation, analysts saw the latest Ifo economic institute’s business confidence survey as underscoring optimism that Europe’s biggest economy will remain on a growth track

“Its not all gloom,” said Rainer Guntermann, senior economist with the investment house Dresdner Kleinwort Wasserstein.
Moreover, the release of the latest Ifo index came hard on the heels of a raft of key German data which pointed to a more upbeat fourth quarter, after growth contracted sharply to a meagre 0.1 per cent in the three months to the end of September as high oil prices hit the nation’s economic expansion.
This includes unexpectedly strong production data and factory orders, with German retail sales surging by 2.3 per cent in October after private consumption contracted over the last two years as high unemployment and the uncertainty created by economic reforms dragged down consumer confidence.
Moreover, signs have also been emerging that German consumers have been turning out in force this Christmas to help ensure a relatively prosperous start to the new year.

The GfK research group forecast consumer confidence in the country would edge up in December with shoppers’ willingness to spend rising to a three-year high, and as a consequence paving the way to a solid start to 2005.

Coming in the wake of a protracted slump in private consumption, Europe needs Germany’s comparatively well-heeled consumers to open up their wallets this Christmas so as to offset the impact of the strong euro and slowing global growth on exports.

“The mood is good,” declared Hubertus Pellengahr, spokesman for Germany’s Retail Federation, as the countdown to Christmas has gained momentum.

Meanwhile, Germany’s car industry association said it expects the nation’s auto sales to rise next year for the first time since 1999.

Equally significantly, German exports have continued to defy the euro’s steep rise to post a bigger-than-forecast increase in October while another of the nation’s key economic sentiment reports, the ZEW institute’s investor confidence survey, also unexpectedly rose in December.

At the same time, cost-cutting and this year’s strong export performance means that corporate Germany is tipped to report earnings this year that will outpace its counterparts in the rest of Europe and the United States – with the top 30 members on the Frankfurt Stock Exchange projected to report a 58 percent jump in earnings for 2004.

Nevertheless, economists remain very cautious about the outlook for the German economy with analysts tipping that the country’s growth will slide back to about to 1.5 percent or lower next year after coming in about 1.8 percent in 2004 as global expansion slips back a gear.

This is despite the extra spending power German consumers are likely to enjoy following the introduction next month of tax cuts totalling EUR 7.5 billion.

But the Schroeder government is sticking to its economic growth forecasts of 1.7 percent in 2005 and 1.8 percent in 2004.

In a sense, the tax cuts along with the January launch of tough new welfare rules will also mark the end of the current Schroeder reform drive, which has included far-reaching changes to the nation’s deficit-hit health and welfare systems along with controversial labour market reforms.

Economists now expect Schroeder to pull back from the often deeply unpopular reforms in the hope that an expected build-up in growth towards the end of next year will help Berlin to win over the electorate to its reform agenda before the next national election in 2006.

December 2004

[Copyright Expatica 2004]

Subject: German news, German economy, German reforms