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SPIEGEL ONLINE

06/23/2009 06:43 PM

The World From Berlin

'It's Still too Early for Economic Euphoria'

Important indicators published in recent days are pointing to a light at the end of the tunnel for the German economy. But analysts fear the biggest test is still to come, with the possibility of a steep hike in unemployment, and newspaper commentators remain unconvinced a corner has been turned.

Recent reports on the business and consumer climates in Germany are finally hinting at better times to come -- with improved economic expectations and growing evidence that the worst may have passed for Europe's largest economy.

Continued consumer spending will play a large role in an economic recovery in Germany. Here, a shopping center in Hanover.
DDP

Continued consumer spending will play a large role in an economic recovery in Germany. Here, a shopping center in Hanover.

In its monthly business climate index released on Monday, Germany's Ifo economic think tank reported that the country's most important economic mood indicator rose again for the third straight month-- even exceeding expectations for June. The indicator jumped from 84.2 points to 85.9, but economists had only forecast a rise of anywhere from 85.1 to 85.3.

According to the poll, the 7,000 companies surveyed are viewing the upcoming six months more optimistically than previously. They describe their current states as minimally worse than in May -- with that indicator falling from 82.5 to 82.4.

Additional good news arrived on Tuesday with the release of new data from Nuremberg-based market research firm GfK. The group's monthly consumer climate index rose from 2.6 to 2.9 points. "Following the recent growing number of signs that the economic downturn may be coming to an end, consumer hopes of economic stabilization are intensifying and, accordingly, economic expectations are increasing moderately," GfK said in a statement about the monthly poll of 2,000 people. Still, GfK said the consumer climate remained "at a low overall."

Nevertheless, the report included several positive indicators as well. In June, consumers' so-called "propensity to buy" went up to 14.5 points, an increase of two points over last month. Income expectations also climbed 6 points to stand at -3.3.

Currently, private consumption is the greatest supporting factor in the German economy, Germany's central bank, the Bundesbank, stated in a report on Monday. The central bank said that Germany's inflation rate sank to 0 percent in May for the first time in 22 years, and experts are expecting prices to fall in June -- all factors that, coupled with government stimulus programs, could spur consumers to spend more.

Together, these factors are helping consumers in Germany to feel better about their immediate financial and employment security. Still, both GfK and the Bundesbank dampened any great expectations. The Bundesbank reported the downward economic trend would stop, at the earliest, during the second half of the year.

"It is to be expected that the forecasted deterioration of the jobs market will increase these unemployment fears, and will place a great amount of strain on income expectations," GfK wrote in a statement. "The real test is yet to come, given the likelihood of rising unemployment in the months ahead."

Germany's economy contracted by a record 3.8 percent during the first quarter of 2009, the result of falling exports and investment. The German Institute for Economic Research (DIW) is forecasting a decrease of 0.8 percent for the second quarter and economists are generally predicting the economy to contract by 6 percent for the year, the worst recession since 1945.

Despite the sudden flurry of more optimisitc news, German commentators on Tuesday express their doubts about a swift economic rebound.

The center-right Frankfurter Allgemeine Zeitung writes:

"Many economists are rubbing their eyes in puzzlement: The German economy is in the midst of an extremely severe recession and yet the company views on the economic situation are dramatically improving. Since the beginning of the year, the Ifo Business Climate Index has undergone a steep climb after hitting its low point. But the economic outlook remains bleak."

"The rise in economic mood indicators is not a sign of a great economic rebound. While the collapse might be slowing, it will still continue to sink. A 6 percent economic contraction for the entire year is a realistic prognosis. A sluggish recovery might then set in but the danger of setbacks remains high. For the public ... the worst is still to come: the return of mass unemployment."

The Financial Times Deutschland writes:

"The worse the actual economic situation, the greater the hope is that things will someday improve. Economic mood indicators like the Ifo Business Climate Index also follow this principle. The fact that the most important German economic barometer in June has shown improvement for the third time in a row doesn't mean that the economic realities faced by those companies questioned have actually improved. On the contrary: The companies have never experienced such a bad situation before. The only thing that has improved is expectations for the next six months...."

"Whether the economy will improve as much as expectations indicate ... is by no means certain. After the sharp collapse of worldwide demand, the German economy remains extremely fragile even in the current early stages of recovery. There are plenty of dangers threatening an upswing. First among them is the price of oil, which has dramatically increased to $70 per barrel in recent months."

"But it's not just the cost of raw materials that could foil an economic recovery. Politics and central banks must avoid mistakes. Despite spreading fears of inflation, it is definitely too early to take the liquidity out of the markets ... similarly damaging move would be to raise the value-added tax after the election, which some economists and politicians are considering."

The conservative daily Die Welt writes:

"This crisis has never seen so much optimism: The German economy appears to have stopped its dramatic downturn."

"But it is still too early for euphoria. The low point of the economic slump seems to have been reached but when things might begin to improve remains to be seen. World trade will continue to founder in the coming months and foreign demand will remain weak. Companies must live with low sales during the next months. At the same time, many firms will not get the bank loans they need to bridge the gaps."

"The most threatening repercussions from the crisis are still imminent: Even the companies that have thus far made an effort to hold onto as many jobs as possible will begin to lay off employees in the second half of the year. Still, the worst might not be as bad as feared: More positive announcements might follow today's good news.... Companies already want to get rid of fewer personnel than previously planned. If things stay that way, that would be the best news of all."

The business daily Handelsblatt writes:

"Under normal circumstances, a sigh of relief would have been breathed in Berlin's government district on Monday. The Ifo Business Climate Index, an important early indicator for the economy, increased for the third time in a row. That would normally be a sure sign for the beginning of an economic upswing. The absence of a universal sigh of relief indicates one thing in particular: nobody considers this to be a normal crisis. The belief in a speedy recovery has disappeared."

-- Jessica Mann, 12:30 p.m. CET

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