Treasury Strategy & Transformation
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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.