Strategic Treasury

The Export Champion Suffers in Worldwide Recession The global economic crisis has hit Germany, the world’s export champion badly, and both exports and investment have plunged. The employment situation too is set to worsen drastically over the course of the year.

The Export Champion Suffers in Worldwide Recession

by Dr Ralph Solveen, Deputy Head of Economic Research, Commerzbank AG

The global economic crisis has hit Germany, the world’s export champion badly, and both exports and investment have plunged. The employment situation too is set to worsen drastically over the course of the year. It will take some time before the government’s economic packages and above all the ECB’s generous rate cuts start to take effect, and it seems unlikely that the German economy will start to rally until next year. At that stage, however, German companies will be able to take full advantage of the competitive advantage built up in recent years, resulting in Germany performing better than the Eurozone average.

The Ifo Business Climate (index for industry and trade in Germany) is at a very low level, with a slump in industrial order intake. With more and more companies going over to short-time, the evidence suggests that the German economy is in the worst recession in the history of the Federal Republic. The global economic crisis has hit exports in particular, but also investment. The automobile markets around the world have taken a plunge, hitting Germany particularly hard. Consequently, the first quarter of this year too can be expected to bring severe contraction.

The best that can be hoped for, over the rest of the year, is that GDP will stabilise. The ECB’s generous rate cuts will not start to kick in until the turn of the year, so given the time that it takes for rate cuts to take effect, high short-term interest rates over most of 2008 will continue to discourage investment in particular.

The government’s economic packages have the potential to boost private consumption, since they will raise disposable income by 1.25%. The marked drop in energy prices will also afford considerable relief to private households. Nevertheless, we expect private consumption to fall, since the employment situation is set to deteriorate drastically. The number of unemployed can be expected to hit 4m by the end of the year, and this trend will continue in 2010.

There are, however, reasons to hope that the economy will start to pick up in 2010. The fallout from the financial crisis should gradually start to fade, and the ECB’s rate cuts will have a greater impact. The bank’s key rate is already on an all time low of 1,25 %, and the short-term real interest rate is close to zero.

Outperforming the Eurozone in 2010?

The world economy overall is expected to start picking up again gradually in 2010, and Germany’s economy should then fare better than the Eurozone average:

  • In many countries, such as Spain and Ireland, economic activity will continue to suffer this year and probably the next due to the house price bubble bursting, whereas Germany has not seen a house price boom to the same degree.
  • The same is true of corporate and private debt ratios. These have risen sharply in a number of European countries in recent years, but have barely changed in Germany. A thorough overhaul of corporate finances of the kind Germany experienced at the start of the decade does not appear necessary now.
  • Germany has been able to improve its price competitiveness in recent years, especially compared to the other big Eurozone countries. This has not been enough to prevent a slump in demand from abroad, but in the long run it should help to win market share around the globe.

Compared with earlier recoveries, this one will be on the modest side. The financial market turmoil will continue to have an effect, and exports too will suffer from a fall in house prices in countries to which it exports. In other words, Germany will be affected indirectly, via its dependence on exports, following the previous excesses in these markets.

Inflation likely to fall below zero for a time

The sharp dip in energy prices and the end to soaring food prices brought German inflation close to zero in March. This compares with well over 3% at only mid-year 2008. In 2009 too, inflation rates will be determined largely by energy prices. We envisage inflation retreating even further in the first half of the year on account of an increasingly large basis effect: energy prices soared in the early months of 2008, whereas in the months ahead we expect them to continue falling, especially gas prices. We could even see negative figures in mid-year. After that, inflation will probably start to rise again, as the basis effect will work in the opposite way: energy prices have been falling since mid-2008, whereas they are more likely to rise in the latter part of this year.

However, the core inflation rate is unlikely to change much. There was a threat for a while of accelerating wage growth pushing up this rate, but this no longer seems to be the case. The recession will, in fact, check wage growth. However, we do not envisage actual deflation, i.e. a sustained fall in prices across the board.

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