Outlook Dims for European Juggernaut: German Economy Starts to Cool Down

Is the party over for the German economy, which has been enjoying its strongest boom since reunification? Sentiment indicators and company forecasts point to a slowdown caused in part by weakening activity in China. Fears are also growing about the US outlook and the simmering euro debt crisis.

A German worker at Thyssenkrupp inspecting rolls of steel. Zoom
DPA

A German worker at Thyssenkrupp inspecting rolls of steel.

Germany staged an impressive recovery from the 2008/2009 global economic crisis, but there are increasing signs that the boom is now coming to an end.

After almost two years of strong growth, its economic outlook is starting to deteriorate, due to a slowdown in major emerging markets including China and fears of a possible United States recession caused by $2.4 trillion in spending cuts linked to the debt ceiling deal.

Various indicators released in recent weeks point to a deceleration of Europe's largest economy.

The Ifo business climate index for July fell sharply to its lowest level in nine months, and analysts say it is likely to keep dropping. The ZEW investor sentiment index showed the weakest level since January 2009.

And the Markit/BME purchasing managers' index for the German manufacturing sector fell 2.6 points in July to 52 points, its lowest level since October 2009. "New order levels went into reverse in July, as fewer export sales helped end a two-year period of sustained growth," Tim Moore, senior economist at Markit, said.

German engineering orders in June rose by just 1 percent year-on-year, after having jumped 21 percent in May, the VDMA engineering industry association said. "There are initial indications that demand for invesment goods has become less dynamic in Germany and in the other euro member states," said VDMA economist Olaf Wortmann.

In addition, top German firms have given more cautious outlooks for the remainder of 2011. Analysts have been paying particularly close attention to what is being said by the chemicals industry, which is regarded as a bellwether for the general industrial outlook because it supplies many different sectors.

BASF, the world's largest chemicals company, last week reported a slowdown in sales growth in the second quarter and said its business momentum was likely to continue weakening in the second half.

Corporate Outlooks Revised Down

Analysts have been lowering their 2011 earnings forecasts for many top German companies in recent weeks following a second-quarter reporting season that failed to live up to expectations.

Over the last year, the German boom has been impervious to surging oil prices, an appreciating euro and the European debt crisis.

Its success in achieving far stronger growth rates than most of its European partners has been attributed to the German business model, with officials and economists praising the country's long-term approach to business, its strength in technical innovation, and the culture of consensus between employers and trade unions that has kept wage costs down for over a decade.

However, Germany has also faced accusations, particularly from the United States and France, that it has been growing at the expense of other major economies. German firms have boosted their competitiveness over the last decade by keeping wage costs in check, thereby limiting consumer spending and imports and ensuring that Germany has been running trade surpluses with most of its major partners for years.

Calls by Paris and Washington for the government to boost domestic demand and redress the chronic trade imbalance have fallen on deaf ears in Berlin.

The German recovery was led by surging exports to high-growth emerging economies, especially China, which has had a nearly unsatiable demand for the products in which Germany specializes -- high-performance cars and machinery.

Bad News for the Rest of Europe

The slowdown in the Chinese economy is beginning to bite, however. Faltering growth in Germany will have knock-on effects on the rest of the euro zone, which has relied on its core economies, Germany and France, for growth while the high-debt nations such as Greece, Portugal and Spain are weighed down by austerity programs aimed at overcoming their debt problems.

First-quarter gross domestic product growth was so strong that Germany is still likely to achieve 3 percent growth in 2011.

Peter Bofinger, a member of the German Council of Economic Experts, a panel of economic advisers to the government, said the debt crises in the US and Europe could lead to a marked slowdown in the German economy.

"We will see significantly weaker growth rates in Germany than in 2010 and 2011," Bofinger told Rheinische Post newspaper on Monday. "Growth rates of more than 3 percent are a thing of the past."

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