Clouds Gather Over German Economy

Signs are growing that Germany’s economy will soon take a hit from the euro-zone debt crisis, an Ifo economist said Friday, after the Munich-based institute’s business confidence index fell to an over two-year low.

“Until now Germany came quite good through the crisis, unaffected by [difficulties in] trading partners like Spain and Greece, but now the clouds are gathering,” Ifo Economist Klaus Wohlrabe said in an interview.

Germany’s closely watched Ifo index of business confidence fell slightly more than expected in June, driving it to the lowest level since March 2010.The climate in the key manufacturing sector took a particularly hard hit amid rising uncertainty and pessimistic expectations of future business developments.

Mr. Wohlrabe’s comments follow a string of weak data that suggest Europe’s biggest economy, which until now has largely shrugged off the debt crisis, may be showing some strain.

Earlier in the week, the ZEW research center’s economic expectations index for Germany fell to a near-14 year low, and data services firm Markit said German business activity shrank in June at its fastest rate in three years.

“We have the fear that now Germany can be affected by the euro crisis,” Ifo’s Mr. Wohlrabe said, echoing comments from Ifo President Hans-Werner Sinn in a statement earlier Friday following the publication of the latest data.

The business survey showed a reading of 105.3 in June, down from May’s 106.9 and beneath expectations for a reading of 105.6.

The euro-zone debt crisis has intensified in recent months, with rising fear among investors causing borrowing costs for Italy and Spain to climb. With confidence low and several economies around the 17-nation euro zone already in recession, the mood among German exporters has darkened and output started to fall.

Mr. Wohlrabe stopped short of predicting Germany will slip into recession. But he warned that the possibility is there if the crisis gets more severe.

“If the uncertainty increases or the crisis escalates then the investment will fall and the labor market will worsen. That is a fact,” he said.

For now, Germany should still see “slightly positive growth” in the second quarter and perhaps in the third quarter, depending on how the crisis evolves over the next few weeks.

Mr. Wohlrabe’s current projections also point to growth in 2012 as a whole, and in 2013.

Inflation should remain in check, he said, and unemployment is likely to remain stable, as companies aren’t hiring or firing people in the uncertain environment. Recent wage increases should also boost consumption, though Mr. Wohlrabe cautioned that the process will take some time.

Pressure is building for the European Central Bank to support the euro-zone economy with a cut in its key interest rate or other form of stimulus.

Mr. Wohlrabe said already-low interest rates have only increased the amount of cheap money flowing into Germany from other euro-zone countries, and an interest-rate cut would only encourage that trend. The problem, he said, is that with all the uncertainly, investors are holding onto the cash instead of investing it.

“I think the ECB is only a substitute to solve the problem,” Mr. Wohlrabe said. “[Lower interest] is not the problem solver for the current crisis.”

Instead Mr. Wohlrabe called on politicians to act.

“The best thing would be for them to send a clear signal for the markets and the economy, so that we have a psychological effect that they will solve this crisis by this specific solution. It will hurt in any case,” he said.

“June’s German Ifo survey reinforces the message already given by the ZEW and PMI surveys this week that the euro-zone’s growth engine has stalled,” said Jonathan Loynes, Chief European Economist at Capital Economics in London.

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2 comments

  1. Pingback: Fear and Uncertainty’ The Euro¬†Endangers German Economy « A different perspective

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