2010 Outlook German Economy in Mini-Boom but New Clouds Gathering

The German economy could recover more strongly in 2010 than many economists have been predicting, because growth is being boosted by the improving global situation and the government's stimulus package. But that doesn't mean the crisis is over -- risks loom from the second half of 2010.

A steel worker in Simmerath near Aachen: The German economy is recovering strongly -- for now.

A steel worker in Simmerath near Aachen: The German economy is recovering strongly -- for now.

By Sebastian Dullien

Most economic forecasters currently expect the German economy to grow by between 1 and 2 percent in 2010 -- an excessively pessimistic outlook given recent economic indicators, which suggest growth may exceed two percent next year.

This is partly due to Germany's strength in exports. In 2009, Germany was initially affected more severely than other nations by the global economic downturn because of the sharp decline in world trade and because it specializes in sectors that were among the worst hit, such as auto manufacturing and engineering.

But now, with signs that those sectors and global trade are gradually returning to normal, Germany stands to benefit more than other economies. Most countries have moved out of recession, trade is growing sharply and companies are investing once again. As a result, foreign orders for products made in Germany have jumped. German industrial orders are now 20 percent higher than they were at the worst point of the crisis, and auto orders have leapt almost 50 percent.

At the same time companies are replenishing the stockpiles of semi-finished and finished products they had run down during the first six months. As worldwide demand recovers, those inventories will grow again, helping to revive economic activity.

In addition, the government's stimulus package launched at the start of 2009 will continue to pump funds into the economy well into 2010. According to the IfW Institute in Kiel, one of Germany's leading economic institutes, the government will invest more on construction in 2010 than it did in 2009. That will help safeguard jobs and support economic growth. All these factors point to robust growth in 2010.

Great Recession Isn't Over Yet

But that doesn't mean Germany has gotten over its worst economic downturn since the 1930s. The major economic institutes expect unemployment to rise in 2010 because even if the economy grows at 2.5 percent, its output will still be below pre-crisis levels. Many companies will have surplus capacity including too many employees, and they will have to start making people redundant. It's not surprising that the industrial purchasing managers plan major job cuts, according to surveys by the pollster Markit Institut, even though orders have recovered strongly. As a result of the rising unemployment, private consumer spending is unlikely to boost growth, despite the imminent tax cuts.

In addition, companies will be more cautious about investing than they were in previous recovery phases, because the banking sector is still beset by problems. It will remain difficult for companies to get hold of fresh credit, and many of them have been so hard hit by the slump in sales revenues in 2009 that they lack the cash to finance their investments themselves.

Another factor is that the strength of the euro against other currencies is making it hard for German companies to maintain their market share, because their products have become more expensive abroad.

So the economy remains vulnerable. It may run into trouble from mid-2010 when the government itself could turn into an economic risk. After May 2010, when the regional election in North Rhine-Westphalia -- Germany's most populous state -- is out of the way, the center-right government in Berlin may decide to tackle its burgeoning debt by imposing deep cuts in public spending.

Risks Loom from Late 2010

From 2011 onwards, the government will need to cut spending by tens of billions of euros in order to meet a self-imposed target to curb its own borrowing. Regardless of whether the government slashes benefits or scales back public investment in infrastructure projects, the economy is bound to suffer.

In that environment, a further appreciation of the euro or the collapse of another bank could choke off the recovery and even push the economy back into recession.

The sole comfort is that these risks are only likely to emerge in the second half of 2010 or even in 2011. Until then the German economy has time to breathe -- and it will probably grow at a pace of more than 2 percent in 2010.


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