The Calm Before the Storm Bracing for the Global Downturn

As the year draws to a close, and as the world faces recession, a credit crunch and job worries, the economic outlook is the bleakest it has been in postwar history. The next year is expected be a test of strength for the German economy. Will the country's export strength prove to be its Achilles heel?


Last Friday, the world came to a standstill in Sindelfingen, a town located near Stuttgart. On normal days, about 1,500 trucks and 52 rail cars arrive at the Mercedes plant in Sindelfingen, carrying steel and glass, tires and dashboards, headlights and seats. More than 36,000 employees pass through the factory gates every day to develop new models and assemble the current ones -- the Mercedes C, E and S classes. On normal days, at least 1,500 cars roll off the assembly lines at the plant. But what is normal nowadays, with new reports on the recession coming in each day?

Now the Mercedes plant is closed -- until Jan. 11. Production facilities worth billions have been shut down. Everything, from the paint shop to the welding and production robots to the assembly line itself, has stopped moving.

Daimler, like Ford (at its German plants), Opel, BMW and VW, has stopped production temporarily. The German auto industry, which is responsible for one in seven jobs, is putting itself into something resembling an artificial coma. Some companies are using working time accounts to keep their employees at home, while others have introduced a shortened workweek. No one knows what will happen next year.

When plants are shut down in Germany's automotive production centers -- Stuttgart, Munich and Wolfsburg -- it also affects the employees of the carmakers' suppliers: engineers working for transmission manufacturers, technicians with the steel companies, and creative talent at ad agencies. Silence has descended on places that were once hubs of busy activity, from hammering to filing, drafting to designing.

And a ghostly silence it is, this national standstill. Order volume has plummeted across the board in German industry, and the markets are shrinking at a breathtaking pace. Planned investments are being cancelled or postponed. The economy has entered a recession of previously unimaginable proportions.

The Greatest Stress Test Since Reunification

Economists are predicting new alarming scenarios for 2009 almost every day. Pessimistic estimates of the amount by which the German economy will shrink range from 0.8 to 2.2 percent.

Experts are also outdoing each other with worrisome new unemployment figures. The Organization for Economic Co-operation and Development (OECD) remains cautious and expects about 700,000 people to join the jobless in Germany by the end of 2010. Others, like Dirk Schumacher, chief economist at the Goldman Sachs office in Germany, want to prepare us for the worst: Six million jobless, he says, is conceivable.

Even the German government is revising its forecasts. While the experts in Berlin predicted miniscule growth for 2009 in October, they now expect the economy to shrink by 2 percent. This would catapult the government deficit from zero to about three percent of GDP, to reflect decreased tax revenues and increased expenditures for unemployment benefits.

"On the whole, next year Germany will likely face its greatest stress test, at least since reunification," states the draft version of the government's new annual economic report, which also notes that economic development has "weakened drastically." The government's economic experts do not expect the economy to return to positive territory by 2010. And on Wednesday, the daily Süddeutsche Zeitung reported that, in its internal calculations, the government is expecting to generate at least €30 billion in new debt in 2009 -- three times as much as in 2008 and the highest level since 1996.

Graphic: Market capitalization of global markets

Graphic: Market capitalization of global markets

Despite the crisis, the coalition government in Berlin has not shown much leadership strength. Officially, Chancellor Angela Merkel of the conservative Christian Democrats continues to oppose additional large-scale government bailout programs. Merkel's finance minister, Peer Steinbrück of the center-left Social Democrats, seems to prefer quarreling with the British and French who, he insists, are frittering away their money with their bailout packages. In doing so, he has also angered many.

In the opinion of German Economics Minister Michael Glos -- a member of the Christian Social Union (CSU), the Christian Democrats' Bavarian sister party -- things are not moving quickly enough. Glos has been increasingly forceful in opposing his own chancellor and, by doing so, throwing his lot in with his party's new chairman, Horst Seehofer. As Bavaria's new governor, Seehofer is trying to demonstrate his strength in the run-up to next September's federal election. Party politics, it seems, has distorted much of the government's response to the crisis.

In November, the chancellor warned the public to be prepared for "a year of bad news." Never in the 60-year history of the Federal Republic of Germany have citizens been this anxious as they enter a new year, plagued by worries of how much worse things can get and, most of all, how safe their jobs are.

How Bad Will Things Get?

On the surface, there has been surprisingly little change. The Christmas markets are as crowded as ever, and traffic remains heavy on highways headed for ski regions. At €0.98 per liter of diesel ($4.92 a gallon), even filling up isn't quite as depressing as it was in the past. Could it be that things aren't nearly as bad as we have been led to believe? Crisis? What crisis?

But with each new report of companies having to increase their write-offs and of credit lines being terminated, there is a growing sense that the country is merely experiencing the calm before a powerful storm, and that it is approaching a turning point. The question is: How bad will it get?

Will 2009 be more like 2001, the year of the Sept. 11 terrorist attacks on New York and Washington, which was followed by only a brief downturn? Or like 1973, the year of the oil crisis, which marked the beginning of a decade of stagnation and inflation? Or will the future resemble 1929, the year the stock market crashed, leading to a worldwide depression that did not, in effect, end until 16 years later, with the end of World War II?


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