German Recovery May Be in Sight Despite Deep Recession

Sources: Reuters, German Economy May Recover by Fall; AFP, German Investor Index Puts Glimmer Into Gloom; Bloomberg, German Stocks Fall for Second Day, Led by Banks, Daimler, BMW; Forbes, German Economy Could Shrink More Than 3 Pct in '09

Despite a recession that is the worst since the Second World War in Germany, there is a light at the end of the tunnel according to two recent forecasts. On Sunday, the German Economy Minister predicted that economic recovery will begin this fall, encouraged by a fifty-billion-euro stimulus package that the German parliament approved on Friday. Then, an investor confidence index released by the research institute ZEW indicated a large increase in confidence for February. Though Germans expect the economy to be worse off in six months than it is now, the expected decrease in conditions is shrinking, indicating that a turnaround may not be far off. Financial experts also suggested that the German economy may reverse course around the midpoint of 2009.

However, despite these positive indications, economic troubles are still expected in the first half of the year, at least. Economic contraction may even be greater in early 2009 than in late 2008, and the ZEW index rated investor confidence in the current economy lower than last month. Analysts are also waiting on other indices to confirm ZEW's numbers. The DIW research institute predicted that GDP contraction for 2009 overall may be greater than three percent, though this is a greater estimate than that made by the German government and other forecasters. At present, German stocks continue to fall as the euro also decreases in value against the dollar.

The contraction of the German economy at the end of last year was driven by a downturn in the manufacturing sector, which in turn meant fewer exports and less investment in the German economy. Consumer spending also decreased slightly as demand fell. Increased inventories in the last quarter also indicated a decrease in demand that was greater than decrease in production. German GDP contracted 2.1% in the last quarter of 2008, and this contraction also creates a drag on the other European economies that share a currency and common market.

Questions:

1) Do you expect that the German economy will recover soon after the midpoint of 2009 as these predictions suggest, or do you think that the recession in Germany is too deep for a turnaround this year?
2) Do you think that the first half of this year will be worse than the end of last year, as suggested by the DIW institute?