Prospects for 2013: German Economy Faces Year of Uncertainty

By and

Will 2013 be an "unlucky 13" for the German economy? Will the country face a recession, or will it succeed in defying the crisis? There is much to suggest that there won't be any major economic setback. The mood on the markets is currently one of cautious optimism.

A German engineer works on a turbine: With exports to troubled euro-zone states falling, the economy has become more reliant on consumer spending. Zoom
DPA

A German engineer works on a turbine: With exports to troubled euro-zone states falling, the economy has become more reliant on consumer spending.

2013 already has many official designations: For UNESCO, it is "World Water Year"; for the Vatican, the "Year of Faith"; for the European Union, "The Year of the Citizen." But can it also be a healthy year for the German economy, Europe's largest? Economists are cautious.

Both the general collapse brought on by the 2009 economic crisis and Germany's record-breaking recovery caught people here by surprise. The consensus among economists for 2013 is that Germany will face steep challenges -- though fewer than those expected in many other countries.

Most economists have already revised downwards their forecast for this year and are even presuming a contraction in economic growth for the final quarter of 2012. The prediction now is for a slight growth in performance in 2013 and -- most importantly -- that the country will avert a recession.

It's an outlook cautiously shared by most German business leaders. According to the Munich-based Institute for Economic Research (Ifo), the current business climate index is poor, but expectations for the next six months have improved significantly.

That sentiment is not rock solid, however. "We measure the uncertainty by determining how wide the variations between companies are in assessing the current situation," warns Ifo chief economist Kai Carstensen. "And that differential has recently increased considerably."

Such uncertainty may seem odd, since the situation is noticeably calmer than at the outset of the financial crisis. The collapse of the United States real estate market in 2008 sent tremors through the global economy, severely affecting German companies.

Yet that drama had the silver lining -- at least from a business perspective -- of having a clear cause and effect. Now, economic growth is dependent on several, much more amorphous factors, such as:

  • The euro crisis
  • The US and Chinese economies
  • Domestic consumption and investment in Germany

The euro crisis is particularly complex and confusing, and thus threatening, to companies. A recent survey of chief executives conducted by the German news agency DPA found that, unanimously, their biggest wish for 2013 was an end to the crisis.

But when it comes to the stock markets, the crisis seems to have almost been calmed. The risk premiums on government bonds for the troubled Southern European members of the euro zone have fallen significantly from their 2012 highs. Even negative headlines like the downgrading of many euro-zone countries and the euro bailout fund itself left investors largely unmoved. This is unlike previous crises, such as Black Monday in 1987. At that time, Carstensen says, "the financial markets were completely unsettled, whereas companies expressed little interest." But now, he adds, "it is the other way around."

Such apparent calm on the financial markets is largely attributable to an Italian -- namely, Mario Draghi, the head of the European Central Bank, and his declaration in July that the ECB would do "whatever it takes" to defend the euro.

Those measures have included emergency loans of around a trillion euros ($1.3 tillion) for ailing banks and the promise of unlimited purchases of government bonds. The instant success was undeniable, with reduced borrowing costs for embattled economies such as Spain and Italy.

But that hasn't solved the underlying problems. "The crisis will only be over when the real economies in Greece, Spain the other problem countries pick up again," said Enzo Weber, director of forecasting at the Institute for Employment Research (IAB) in Nuremberg.

And the ongoing crisis in the southern EU states has hit key German industries, such as the automotive sector.

Daimler, MAN and Opel are all suffering from falling demand in the Mediterranean member states, and they have responded by announcing measures such as the Kurzarbeit system of shorter working hours or savings programs. For these companies, it is of little concern that Spain and Italy are paying less interest on their sovereign bonds. After all, the people of those countries themselves need more money, and more confidence, in order to buy German products.

Growth in China, Risks in the USA

If the situation in Southern Europe doesn't improve in 2013, the German economy will become even more dependent on consumers in the rest of the world -- particularly in the United States and China.

Concerns about a slump in Chinese growth have eased recently, with the World Bank revising its growth forecast upwards. And demand from emerging economies continues to be good.

But the situation in the US is more difficult. President Barack Obama's re-election has dispelled some uncertainty, but the country's political divide is deeper than ever before. The brinkmanship that saw a deal reached on Jan. 1 on the "fiscal cliff" may have averted disaster, but it hardly inspires confidence in the world's largest economy. And while there may have been a last-minute deal, it is difficult to predict what effect it will have. After the Democrats and Republicans reached an 11th-hour deal on the budget in 2011, rating agency Standard & Poor's responded to the deal by stripping the US of its highest rating.

The shakier the global economy, the more important domestic demand becomes. In Germany, companies have been wavering for some time, with investment in new equipment declining over the past year. Consumers, on the other hand, have been a driver of the German economy, a first in a country that has often been criticized for its heavily export-dependent economy.

"Even during the financial crisis, consumption was solid as a rock," said Ifo's Carstensen. "That was because the labor market was supported by measures such as shorter working hours."

However, at the end of 2012, that mood deteriorated, with the GfK consumer confidence index falling twice in a row, largely because of fears over employment prospects. According to a survey by insurer Allianz, the fear of job losses has increased significantly over the past year. Thus far, many German companies had continued to hire new staff, while existing workers benefited from salary increases secured through collective bargaining agreements. According to Weber, however, "that positive trend in the labor market is broken."

During the 2009 financial crisis, after the federal government introduced its short-time working program, many German companies sucessfully avoided layoffs. And Weber believes 2013 will not see any catastrophic plunge. "There will be no major downturn," he says, but rather "more of a long, drawn-out dampening."

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kerrington.della 06/29/2013
Investment suggestions are ALWAYS old news on this topic. When I read the title the news that was back in Feb here in the US, popped out of my mind about the present conflicting assessments of consumer attitudes about the economic climate. Perhaps they simply underscore the economic uncertainty and confusion that is so understandable at this time of political brinksmanship. It will be the countries that are rich with natural resources should find it easier to manage their economies if the Government are not corrupted.
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