Central Bank Forecast German Economy to Contract by 6.2 Percent

Germany's central bank, the Bundesbank, is reporting the country's economy will contract by 6.2 percent in 2009 as a result of the global economic crisis. A recovery is expected to start in 2010, but economists warn Germany will struggle at least until 2013.

After a disastrous first quarter, a new forecast from Germany's central bank, the Bundesbank, indicates pressure on the German economy will lessen later in 2009. "The German economy is currently in a sharp recession," the bank said in a statement on Friday. "Downward pressure on the German economy is likely to ease during the course of 2009." Still, any kind of upturn isn't expected until 2010.

A worker at German carmaker Opel's plant in Eisenach: Germany may have to become less reliant on exports in the future.

A worker at German carmaker Opel's plant in Eisenach: Germany may have to become less reliant on exports in the future.

The Bundesbank now expects the German economy to contract by a record of 6.2 percent for 2009, the worst drop since World War II for Europe's economic leader. That forecast is 0.2 percent worse than previous forecasts published by the German government and leading economics institutes. Despite a slight recovery in 2010, the Bundesbank is still predicting 0.0 percent growth for the year.

The low point of the recession could be reached this summer, the forecast noted. Still, Bundesbank President Axel Weber said it was too early to breathe a sigh relief. The report added that unemployment will continue to rise in the coming quarters, and by mid-2010, the number of jobless is expected to be 1 million people greater than it was this spring -- reaching a total of around 4.4 million unemployed persons, or 10.5 percent.

Economists believe the effects of the global financial and economic crisis will still be felt in Germany for years to come. In 2008, Germany had modest economic growth of 1.3 percent, half as much as the previous year, but a group of leading economists said serious growth wouldn't be seen again for many years.

Norbert Irsch of Germany's KfW development bank and Christoph Schmidt of the economic institute RWI told the Börsen Zeitung newspaper that it would take until 2013 before the 2008 growth level could be achieved again.

However, Stefan Schilbe of HSBC Tinkaus investment bank expressed a little more optimism. He told the paper the German economy is solid. It isn't plagued by a real estate bubble like other countries, he said, and it has a high savings rate with companies that are globally competitive. In constrast to Spain, Britain and the United States, the German economy will be able to reactivate very quickly once global trade picks up.

But exports could prove to be Germany's Achilles heel. RWI economist Schmidt said he believed that the country's economy would not be able to rely on exports as much as it has until now. Germany is the world's largest exporter.

That shift could have dramatic consequences. Compared to other more consumer-oriented countries, Germany has a relatively "equal distribution of wages." As such, he said, the country's relatively generous welfare system could only have been financed by the high-profit margins associated with Germany's high-quality exports.

Irsch said Germany would remain an exporting nation and that there will continue be strong demand in the future for German products like environmental technologies, heavy machinery and automobiles. But the country must also invest more heavily in education and research and development and it must increase and improve its human capital and invest in more environmentally friendly energy technologies, he added. Irsch said that Germany must also be prepared to have a higher budget deficit.

The economists said the government has been too hesitant in its efforts to stimulate the economy. Many of the measures in the government's massive stimulus program won't go into effect until the end of 2009 and the effects won't be felt until 2010, a time when the economy is already expected to start turning around on its own, he said.

dsl -- with wire reports


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