German Economy Still Contracting But With Some Signs of Recovery

Sources: BusinessWeek, German Economy to Shrink 6.2% in 2009; Bloomberg, German April Industrial Output Unexpectedly Declines

Following a poor showing for the first quarter of the 2009, the German economy continues to contract, though the contraction is expected to ease this year. Recovery in Germany is not expected to start until 2010, when the downward trend of growth should begin to reverse. The economy is expected to contract 6.2% in 2009, the most since World War II, which is a slightly higher rate than earlier expected. Though the trend should turn next year, there is still no positive growth in 2010, and it is not until 2013 that the 2008 growth level—a modest 1.3%—is expected to return.

The low point of growth for Germany should occur this summer, though unemployment should continue to rise, lagging behind other indicators. Unemployment is expected to peak in mid-2010 at 10.5%. Though one bank leader suggested that Germany is a better position to withstand the crisis and recover quickly than other countries due to its high savings rate and the lack of a real estate bubble, there are also some problems that will hamper recovery.

Exports, for example, may not be as great as they were before the crisis, which means that the German government will not be able to afford the kind of social security that its citizens are used to. Exports fell at a greater rate than expected in April, as did production, falling 1.9% in April contrary to the expectation of another 0.3% increase as occurred in March. Exports and investment drove the contraction in the first quarter, and the output in investment goods again declined the most in April. Production of consumer goods and energy, on the other hand, rose in April. In May, the contraction of manufacturing eased and business confidence increased in Germany, and there are indications that industrial output may soon bottom out.

Questions:

1) Do you expect that Germany's bad fortune will lead to the rise of another European economic power post-crisis, or do you think that the EU's economic power will fall as a result?
2) Do you think that some of the more positive indications mean that recovery may come quicker than expected, or do you expect that these are aberrations?