Unhappy new year forecast

Germany is continuing to lag behind the booming world, leading expert says

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31. Dezember 2004 By Elise Kissling

In his New Year's commentary, Hypovereinsbank's chief economist jotted down a list of far-fetched events for 2005: After landmark changes to its federal system, he writes, Germany is transformed into a fast-track reformer with one of the European Union's lowest tax rates, a lean social system, booming consumer spending and a deficit of less than 2 percent of gross domestic product.
While Martin Hüfner invites his bank's customers to consider what is possible, most economists are trying to figure out what is likely in 2005. Their forecasts are sobering. The major economic think tanks began lowering their 2005 growth forecasts for Germany this autumn. The latest to knock off a few percentage points was Munich's Ifo economic institute, which projects GDP growth of 1.2 percent next year. That is down from the 1.5 percent forecast made jointly by the six leading economic institutes.
The world economy is growing faster than it has in 28 years, but the German economy is not part of it, Ifo's economists say, adding that Germany will continue to be the European Union's growth laggard. “Germany is disconnected from the world,“ said Ifo's president, Hans-Werner Sinn. “No other country in central or western Europe has grown as slowly between 1995 and 2004.“
Chancellor Gerhard Schröder disagrees. “The prospects for the German economy in 2005 are excellent,“ Schröder said on Thursday. The government is sticking to its official forecast of 1.7 percent growth next year.
This time around, industry agrees with this official optimism. The economy will continue to grow next year, Axel Nitschke, chief economist of the Association of German Chambers of Industry and Commerce said in a year-end address. Pointing to a survey among nearly 10,000 industrial companies, Nitschke said German industry was looking “to the year 2005 with considerable optimism.“
Ifo was the last economic institute to lower its 2005 growth forecast. Kiel's World Economic Institute lowered its prediction to 0.8 percent and the Hamburg Institute of International Economics to 0.9 percent. The Halle Institute for Economic Research and Essen's RWI project gross domestic product to expand by 1.3 percent
Fear that export growth will slow as the euro rises against the dollar is behind the growing pessimism. The euro reached a high of $1.36 this month after starting the year at $1.26. The chamber association members said that despite the rising euro, German industry was competitive enough to succeed in global markets next year. They said several factors contributed to the improvement: Companies had outsourced work-intensive production phases to low-wage countries, and conditions in Germany had improved. The industrial companies surveyed are also planning to step up their investment activities because they expect orders to shoot up, the chamber association said.
Optimism was greatest among export-heavy industries such as medical technology, electronics and engineering, while the outlook in the construction industry and other sectors dependent on the domestic economy is still bleak. More than half of the country's 43 industry associations say the mood in their industry is better than at the beginning of 2004, according to a survey conducted by the Institute of the German Economy in Cologne. An additional 13 say the mood in their industry is unchanged. Only eight are more pessimistic than a year ago.
The institute said export prospects were fueling the optimism. “However, a gradual domestic recovery will also play a role,“ said the institute's director, Michael Hüther.
But the organization said the survey results did not bode well for employment. The country's biggest employers - retailing, construction and the trade sector - said they would continue to downsize in 2005.
This view was underscored by the latest survey results from GFK consumer research institute. In December, consumers said they expected the economic situation to deteriorate, the third consecutive month of decline. On the other hand, a growing number of consumers said they expected their incomes to rise and were prepared to make major purchases.

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