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The Really Fat Years are Over for Now

by Dr. Ralph Solveen, Dep. Head Economic & Commodity Research, Commerzbank AG

In the past few months German sentiment has grown more sober as more and more people realise that the high growth rates of 2006 and 2007 are unlikely to be repeated in the near future. Growth this year will not exceed 11/2%, although this would still put the German economy back on the growth course that is expected medium term.

It’s not just about subprime

Even if many people were still expecting a lasting upswing in Germany in mid 2007, with growth rates of 2% or higher, the increasingly visible downturn did not come as a surprise. The subprime crisis in the US and the resulting turmoil on the financial markets are often cited as triggers, but their impact on the real economy will probably have been only limited, at least to date. The overall economic conditions, virtually ideal for several years, had in fact already started to deteriorate in the last months:

  • With the ECB’s rate hike of 200 basis points in total between the end of 2005 and mid 2007, the strong tailwind that monetary policy had been giving the economy for some time changed into a headwind.
  • Growth in foreign demand had been losing momentum on the back of the downward trend of the US economy since the start of 2007.
  • The strong euro has severely weakened the price competitiveness of German and European products on the global market.
  • Domestic demand has also suffered because of the substantial rise in energy and food prices.

Consequently, it is not very surprising that the year-on-year rise in real GDP was only 13/4% at the end of 2007, compared to nearly 4% a year earlier.

Weaker exports and investments

A far-reaching improvement is not in sight in the near term either. At the moment, everything suggests that the US economy will perform very weakly, at least in the first half of the year. Even if a deep recession can be avoided – and we assume it can – this will still put a firm brake on the global economy. The ongoing hopes that the global economy can be decoupled from the trend in the US are hardly likely to be met. The emerging markets have gained much importance in recent years, but they still cannot compensate for notably weaker demand from the US. The strong euro will also curb exports.