Think tank says economic recovery under way

28th July 2004, Comments 0 comments

28 July 2004, ESSEN - A leading German economic research institute, RWI, revised its full-year growth forecast for Germany Wednesday to 2.1 percent in a fresh sign that the power has kicked back into Europe's biggest economy at last.

28 July 2004

ESSEN - A leading German economic research institute, RWI, revised its full-year growth forecast for Germany Wednesday to 2.1 percent in a fresh sign that the power has kicked back into Europe's biggest economy at last.

The Essen-based Rheinisch-Westfaelische Institute had in February tipped 1.8 percent growth, but strong exports, evidenced by new figures Wednesday from the machinery industry, have come to the rescue.

At the same time, a survey of consumer sentiment found the German public had not got the message. Confidence had plunged since June, pollster GfK said, and most Germans believe they personally were going to be the losers in promised economic reforms.

RWI kept its prediction for next year in check Wednesday, saying it still only expected German growth of 1.8 percent in 2005 and believed employment would only expand very gradually, with a decline in jobless numbers not likely till the end of 2004.

"Our assessment in February that a recovery has begun has turned out right," RWI economist Roland Doehrn told reporters.

The upgrade followed a Tuesday report from ifo, a Munich-based economic institute, of rising business sentiment and this week's increased growth estimate of 1.8 percent for the full year from the conservative Bundesbank.

Exports are cheering German engineering companies, with a 4 percent boost in the machinery industry's output being forecast for the full year, according to an economist for the VDMA trade association Wednesday.

"This is not turning out to be a year of mild recovery as we expected, but one of genuine upturn," said Olaf Wortmann in Frankfurt.

Last month the VDMA doubled its forecast of industry growth from 2 to 4 percent and might raise it yet again as members report order books improving steadily. In 2003, machinery manufacturing in Germany contracted by 1.2 percent.

The VDMA said first-half orders rose 18 percent compared to January-June of 2003, with the export orders up 21 percent and the domestic orders up just 13 percent.

Despite Germany's economic malaise, domestic machinery users were now finding they had to catch up after a period of holding back investment and were more willing to spend, according to Wortmann.

Over a three-year period, most German factories had suspended investment. In that time there had been so many technological advances that they were now compelled to order new machinery if they wanted to stay competitive.

The German machinery industry exports about 70 percent of its output. In June, the industry was running at 85.9 percent of capacity.

"That's finally got back to an optimal level," said the VDMA economist. He said the upturn remained at risk from two factors: the strong euro and the sharply rising cost of raw materials, which were cutting into earnings.

Echoing that, RWI said many companies were producing at near capacity and had to invest. This would flow through into general domestic consumption next year "provided the spark of growth ignites the labour market", Doehrn said.

Consumer confidence in Germany dipped this month, wiping out a gain in June and signalling more problems for retailers, according to a leading index produced by the Nuremberg-based GfK market-research company.

The survey showed consumers significantly more pessimistic than German business people and economists who have picked up signs in recent weeks of export-led growth. The economic-expectations index slumped from minus 12 in June to minus 20.5 in July.

That was the lowest level since May 2003. Commenting on the figure, GfK said consumers did not believe in an economic turnaround or an upsurge in employment in the near future.

The German headlines have been occupied for weeks with the tough new regime for more than 2 million long-term unemployed in Germany: they must all reapply for welfare grants, which will total well under EUR 1,000 monthly per person.

GfK said awareness of unemployment and poverty had spread the idea that neither business nor government was able to put Germany economically right.

A separate index of how Germans expect their personal incomes to develop flipped from plus 3.5 in June to minus 7.5 in July.

According to GfK, this pessimism derived mainly from fears that private households faced major new costs, principally from a reform of public health insurance. The proposed changes are to reduce the load on high earners and spread the premiums on more shoulders.

An indicator of consumer willingness to buy big-price-ticket items improved by a sharp 16.6 points in June to minus 24.5, but in July much of the gain vanished, with the index running at minus 37.4.

Many Germans believed that after social-welfare reforms they would have less disposable income, not more.

GfK chief executive Klaus Wübbenhorst said in an interview, "Consumption begins in the head. Consumers won't spend more unless they feel good. Right now they don't. You can forget private consumption as a growth factor in Germany for this year."

GfK interviews some 2,000 consumers for each survey.


Subject: German news

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