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Economic Recovery In Germany

'The End of the World Has Been Cancelled'

German analysts are greeting an unexpected rise in manufacturing orders with delight, with some going so far as to say the worst is over. Still, plenty of realists are warning that cautious optimism remains the order of the day.

There was a very pleasant surprise in store for the German economy with the release of national manufacturing statistics for May: Orders were 4.4 percent higher than in April. The figures, released by Germany's Economics Ministry on Tuesday, surprised analysts who had only predicted a gain of 0.5 percent. They also made May the third successive month in which orders rose. Additionally business confidence was up and there were also positive signals coming out of the steel industry and from medium-sized businesses. The German stockmarket reacted to the positive news and the DAX went up, although it gave up some of those gains later in the day.

And all of this was considered the first solid indicator of an ongoing change for the largest economy in the euro zone, where Europe's common currency is used. It led to optimism in some German quarters, with Commerzbank analyst Dr Ralph Solveen, going so far as to say, "the end of the world has been cancelled, businesses are beginning to re-stock."

Solveen and other analysts suggested that the German economy had now survived the recession's mid-year, low point and that the latter part of 2009 should continue to see slow but steady growth. "Over the past two months we have seen small but significant gains," agreed the Federal Statistical Office. Most of the orders that contributed to sector gains came from outside of the European Union, with Asian markets particularly helpful; domestic orders were up 3.9 percent while orders from other EU nations rose 1.2 percent.

But other analysts also warned against too much optimism. "This third rise in a row is a nice surprise," said Heinrich Bauer, an economist with Postbank. " But I would be careful about talking about an upswing quite yet." And Norbert Irsch, chief economist of the German state development bank KfW, warned of the danger of an over-optimistic "speculative bubble."

A Scrapping Premium Bubble?

A closer examination of the manufacturing sector gains indicated that a good portion of the rise is due to the German automobile industry. Orders there rose by almost 10 percent, which made industries that had not seen quite as much growth -- such as the makers of heavy machinery and manufacturing equipment, where gains came in at around 5.9 percent -- look better than they actually were.

Although export orders for German cars had risen, some naysayers pointed out that the auto industry's gains could have a lot to do with the German government's scrapping premium. Berlin is paying €2,500 out to car owners who scrap a vehicle that's at least nine years old, and the premium has kept the German carmakers busier than many of their counterparts overseas. But news reports this week indicate the wrecking rebate can't go on for too much longer -- the €5 billion budget funding the rebate is almost used up and it can only pay for another estimated 280,000 old cars. Some German politicians are already calling for the auto industry to "wean itself off the drugs."

Additionally, statisticians pointed out that the Easter holidays in April could have made May's figures look better while economists noted that, though manufacturing might be doing better, the Germany economy would still have to grapple with the ongoing effects of unemployment and public spending in the future.

And although the steel industry has seen a small gain, it continues to languish in the worst downturn seen in decades. Many blast furnaces are still closed and "in the coming months, prospects ... still look dim," said Hans Jürgen Kerkhoff, president of the German Steel Federation recently.

Meanwhile in a reflection of what politicians had been saying earlier in the week, when they warned German banks to loosen up credit facilities, Volker Treier, the chief economist for the German Chamber of Commerce and Industry, said that this "delicate flower" that was the economy shouldn't be hindered by lack of credit.

So despite improvements in business morale and what looks to be some genuine light at the end of a long, dark tunnel, one thing that no one in German business is forgetting -- or can change -- is this: Manufacturing orders are still down 29 percent compared to last year and the country's gross domestic product is still expected to shrink by 6 percent this year.

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