10/14/2008 04:51 PM

Lean Times Ahead

German Economy on 'Brink of Recession'

Leading economics institutes believe the global financial crisis is going to hit the German economy next year. They are downgrading forecasts for 2009 growth from 1.8 percent to a meager 0.2 percent. If the situation deteriorates, they warn, a recession is likely.

Will container ship traffic be on the wane at the port of Hamburg? The global economic downturn is expected to put pressure on Germany's export-led economy.

Will container ship traffic be on the wane at the port of Hamburg? The global economic downturn is expected to put pressure on Germany's export-led economy.

Leading economics institutes believe the German economy is in great danger of recession. In their latest forecasts for 2009, released in an autumn report in Berlin on Tuesday, the institutes note that Germany has been hit particularly hard by fallout from the credit crunch and warn that the country is "on the brink of recession."

Although Germany is still expected to experience growth of 1.8 percent for 2008, that figure is expected to fall dramatically next year. In the best-case scenario, the economics institutes put growth at a paltry 0.2 percent for 2009. And if conditions deteriorate further, the German economy will contract next year. In April, the institutes were still predicting German economic growth for 2009 to be a modest 1.4 percent. The economists are expecting a slowdown in manufacturing and slackening foreign demand for products from the world's top exporter.

"Economic expectations of companies in almost every industry sector have deteriorated, which in the past only generally happened during recessions," the report said.

Germany's problems are part of a wider global downturn, the experts stated in the report, attributing worldwide economic woes to a combination of soaring inflation driven by rising commodities prices, the bursting of the real estate bubble and the ensuing global credit crunch. The report said that it was still too early to determine the ultimate scale and duration of the financial crisis, but it had provided the "greatest factor of uncertainty" in the forecast.

The experts said the current banking crisis threatens to snowball from a liquidity crisis into one of solvency. Massive write-downs and high refinancing costs have drained the financial system of capital. State intervention is required, according to the report, in order to recapitalize a cash-poor banking system.

The report comes just one day after the German government and other European countries announced banking rescue plans. In Berlin, parliament is this week expected to approve the government's €500 billion ($680 billion) plan, which includes a €400 billion financial market stabilization fund to guarantee loans and €80 billion to recapitalize the banking sector through partial nationalization. An additional €20 billion is being set aside as a provision to cover losses. So far, at least, markets have responded warmly to the proposal, with the German blue chip DAX index making its greatest percentage gain in its 20-year history on Monday.

If the banking sector doesn't stabilize, the report warns, investment spending will collapse, dragging the real economy down with it. Spending on capital equipment in Germany is already sinking.

Germany's export sector is seen as particularly vulnerable to a slowdown in capital spending. "Because of the financial crisis, the prospects for economic growth in Germany have significantly deteriorated," experts said. "In addition to the financial sector, the export industry could be particularly hard hit by the crisis."

Despite the threat of recession, the report advises against a traditional economic stimulus package, calling such an approach "unpromising." Instead, in addition to stabilizing financial markets, the report recommends a reduction in taxes and social spending.

The unemployment rate in 2009 is expected to remain steady at 7.5 percent. Inflation is expected to ease slightly from 2.8 percent to 2.3 percent.

The economic report is released regularly by the Kiel Institute for the World Economy (IfW), Essen RWI in cooperation with Vienna's Institute for Higher Studies, Munich's Ifo in conjunction with the Swiss Technical College (ETH) in Zürich and another group that includes the Halle Institute for Economic Research (IWH), Vienna's Wifo and Düsseldorf's IMK.

-- cpg with wire reports.


Related SPIEGEL ONLINE links:

All Rights Reserved
Reproduction only allowed with permission