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Home > Blogs > Anthony Harrington > German economy—Cautious optimism but job losses to 2011

German economy—Cautious optimism but job losses to 2011

Finance Blogger: Anthony Harrington Anthony Harrington

As one of the major motors of the eurozone, the health of the German economy is of huge significance to businesses in Europe and beyond. In its report for December 2009 the Bundesbank makes what it can of a not particularly pretty picture.

The good news is that Germany seems to have turned the corner and got itself back into growth mode—no surprise there, since the emergence of the German economy from recession was trumpeted far and wide in 2009. The bad news is that the best the Bank can foresee by way of growth for the German economy in 2010 is a mere 1.6% and its expectations for 2011 are even lower, at 1.2%. Moreover, the Bank fully expects to see job losses increase throughout the period.

The serious question the Bank poses in a fascinating “breakout” box embedded in the 138-page report is whether and to what extent the 2008/09 crash inflicted lasting damage on the German economy. This, of course, is a question that one can come at from a wide variety of angles. Posed of Western economies in general, it is an implicit part of all those arguments which see the crash as facilitating a permanent shift in economic power from the West to the East.

The Bank starts from the following premise: “The German economy suffered a severe slump in output as a result of the international economic and financial crisis. The nature and magnitude of this shock suggests that it was not merely a cyclical phenomenon, but that the medium term growth path was also harmed.”

The Bank frankly admits that there are far too many variables for it to provide an answer to the question at this stage, but it focuses on the fact that all across the world, businesses are struggling with excess production capacity and thin levels of demand. With its many specialized exporters this is not a good global scenario for the German economy, which will have to go through a reorientation process—banker speak for exporters sharpening up their capacity for spotting and exploiting half chances and revising any dreams they might be harboring of being able to rely on a “business as usual” approach to traditional markets.

On the down side, since cooperation between employers and employees has resulted in all kinds of cost-cutting fudges rather than massive redundancy programs, German businesses are still overmanned relative to the demand they are experiencing. The Bank is also worried about businesses cutting back on R&D and losing competitive position from the lack of innovation, though it takes heart from the fact that companies have, in general, tried to hang on to core staff with deep technical knowledge.

The more worrying scenario, the Bank says, is that companies will be tempted to postpone investment in leading edge technology and plant and that this will lead, over a period through to the end of 2011, to a loss of productivity. If that happens the Bank foresees “direct damage to potential output of at least 2% by 2011.” The report, while it has its encouraging moments, is not happy reading for anyone hoping for the real economy to roar away in the coming months.

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Tags: economic recovery , future prospects , Germany , real economy
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