The engine that keeps Europe from falling into the abyss, is about to expereince the effects of a recession minus the hundreds of billions it had two years ago.
By Sarah Marsh
BERLIN (Reuters) - After breezing through the euro zone debt crisis for the past two years, Germany's economy could fall into recession as anxious businesses hold off on investment and exports wither.
Economists who once predicted a mere slowdown in growth for Europe's largest economy are now slashing their forecasts and predicting contraction, possibly for two consecutive quarters, depriving the region of its most powerful motor.
In a sign the government is worried about the darkening economic outlook, Berlin last week resurrected its bank rescue fund and said it could reinstate "Kurzarbeit" subsidies that helped firms pare back working hours without firing staff.
Both measures were first introduced at the height of the global financial crisis, when the German economy suffered its worst annual contraction since World War Two.
"It's not a classical recession, here we are dealing with a large amount of uncertainty due to the euro zone crisis which will weigh on investment and trade," said Felix Huefner, an economist at the Organisation for Economic Co-operation and Development (OECD) in Paris, who follows Germany.
"The fundamentals actually look better than in other countries, with little need for fiscal consolidation, solid household debt levels, unemployment at a 20-year low."
Huefner said Germany had nonetheless entered a "mild recession," with the economy likely to contract in the fourth quarter, and stagnate in the first three months of 2012.
Some are much more gloomy: the Duesseldorf-based IMK on Tuesday became the first major German economic institute to predict the economy would shrink over the full year, forecasting contraction of 0.1 percent.
Firms look set to hold back on investment because they are uncertain they will be able to sell their wares with key export markets reducing spending and implementing austerity measures.
This will deprive the economy of what was one of the main drivers of growth. Capital equipment spending contributed 0.2 percentage points to third quarter expansion.
The ZEW index of German analyst and investor sentiment has declined nine times over the past ten months.
"The key factor is the euro crisis which has been getting worse over the last month," said Christian Schulz of Berenberg Bank, which sees the economy contracting 0.1 percent in Q4 and 0.9 in the first quarter of 2012.
"There was hope the EU summit might resolve it, but those hopes were disappointed," he said, referring to a meeting of European leaders on December 9th at which they agreed to move towards a form of "fiscal union" but failed to map out a clear path for shielding big economies like Spain and Italy.
Recent data showed German exports falling in October at their sharpest rate in half a year. A breakdown of unadjusted month-on-month data showed exports to the crisis-hit euro zone dropping 8.5 percent, versus a 6.1 percent overall slide.
Economists say emerging markets, where growth is strong but easing, are unlikely to lend enough support to compensate.
The head of Germany's exporters' association (BDA), Anton Boerner, has likened the euro zone debt crisis to a "sword of Damocles" hanging over the real economy.
The export-dependent manufacturing sector contracted for a third straight month in December on a steep fall in new orders, Markit's purchasing managers' index showed last week.
Several German firms have already fallen victim to the tougher climate. Solar module maker Solon and the world's No.3 printing machine maker Manroland have both filed for insolvency.
Not everyone is so downbeat, however. After reporting a slight rise in its business climate index this week, the Ifo think tank played down the prospects of a recession.
"Europe will end up getting a mild recession while Germany will be able to disconnect from that somewhat. We don't see any signs of a recession for Germany at the moment," Ifo economist Klaus Abberger told Reuters.
WEAK DOMESTIC DEMAND
Private consumption, which grew at its strongest pace in more than a year in the third quarter on a robust labor market, offers a glimmer of hope for the economy.
Unemployment fell more than expected in November and the jobless rate is at a 20-year low. Trade unions have been negotiating higher wages and consumer morale held steady into January on better income expectations and views of the economy.
However, private consumption is taking off from a very low level in Germany where savings levels are traditionally high and consumers wary, and it will not be able to offset the decline in investments and exports.
Economists also see downside risks for consumption because of the euro zone crisis. Metro, the world's No.4 retailer, issued a profit warning this month, saying the crisis was undermining sentiment and Christmas trade had started slowly.
Employment trends lag changes in growth and cautious German unions may be more focused on job security than seeking large wage hikes amid so much economic uncertainty.
Any small wage rises will be offset by inflation, which is stronger in Germany than the euro zone at large, market researchers GfK said, predicting consumers' purchasing power would stagnate next year in real terms.
Thus, this downturn will expose again the imbalances in Germany's economy - its dependency on external demand and the weakness of its domestic sector.
"Germany won't be able to rely on exports to drive growth and business investment will only hold up if there is a recovery in domestic demand," said Simon Tilford, chief economist at the Centre for European Reform in London.
"So everything hinges on getting domestic demand growing sustainably and there are some formidable obstacles to that."
Tilford said Germany should for example hike wages and ease back on fiscal consolidation - unlikely given Berlin is Europe's fiscal hawk.
"Germans' outlook is better than much of Europe but the idea Germany is on the cusp of a decade of rapid growth is fanciful," he said. "The outlook for German growth is pretty poor."
MEANWHILE, yet another European nation has lost its economic engine -
Hungary is having to pay more to borrow money after the ratings agency Standard and Poor’s downgraded the country’s credit score to junk.
Hungary’s rating went down from BB+ to BBB minus. The agency said it had doubts about the central bank there.
S&P said changes in the constitution had undermined the independence of the bank, and Hungary’s policy framework had become more unpredictable.
AND if Hungary wasn't enough - Greece, Ireland, Portugal, and Spain following suit, followed closely by Italy ... the worst possible for the poor French -
germany
Analysis: Germany faces recession risk as crisis hits confidence
By Sarah Marsh
BERLIN (Reuters) - After breezing through the euro zone debt crisis for the past two years, Germany's economy could fall into recession as anxious businesses hold off on investment and exports wither.
Economists who once predicted a mere slowdown in growth for Europe's largest economy are now slashing their forecasts and predicting contraction, possibly for two consecutive quarters, depriving the region of its most powerful motor.
In a sign the government is worried about the darkening economic outlook, Berlin last week resurrected its bank rescue fund and said it could reinstate "Kurzarbeit" subsidies that helped firms pare back working hours without firing staff.
Both measures were first introduced at the height of the global financial crisis, when the German economy suffered its worst annual contraction since World War Two.
"It's not a classical recession, here we are dealing with a large amount of uncertainty due to the euro zone crisis which will weigh on investment and trade," said Felix Huefner, an economist at the Organisation for Economic Co-operation and Development (OECD) in Paris, who follows Germany.
"The fundamentals actually look better than in other countries, with little need for fiscal consolidation, solid household debt levels, unemployment at a 20-year low."
Huefner said Germany had nonetheless entered a "mild recession," with the economy likely to contract in the fourth quarter, and stagnate in the first three months of 2012.
Some are much more gloomy: the Duesseldorf-based IMK on Tuesday became the first major German economic institute to predict the economy would shrink over the full year, forecasting contraction of 0.1 percent.
Firms look set to hold back on investment because they are uncertain they will be able to sell their wares with key export markets reducing spending and implementing austerity measures.
This will deprive the economy of what was one of the main drivers of growth. Capital equipment spending contributed 0.2 percentage points to third quarter expansion.
The ZEW index of German analyst and investor sentiment has declined nine times over the past ten months.
"The key factor is the euro crisis which has been getting worse over the last month," said Christian Schulz of Berenberg Bank, which sees the economy contracting 0.1 percent in Q4 and 0.9 in the first quarter of 2012.
"There was hope the EU summit might resolve it, but those hopes were disappointed," he said, referring to a meeting of European leaders on December 9th at which they agreed to move towards a form of "fiscal union" but failed to map out a clear path for shielding big economies like Spain and Italy.
Recent data showed German exports falling in October at their sharpest rate in half a year. A breakdown of unadjusted month-on-month data showed exports to the crisis-hit euro zone dropping 8.5 percent, versus a 6.1 percent overall slide.
Economists say emerging markets, where growth is strong but easing, are unlikely to lend enough support to compensate.
The head of Germany's exporters' association (BDA), Anton Boerner, has likened the euro zone debt crisis to a "sword of Damocles" hanging over the real economy.
The export-dependent manufacturing sector contracted for a third straight month in December on a steep fall in new orders, Markit's purchasing managers' index showed last week.
Several German firms have already fallen victim to the tougher climate. Solar module maker Solon and the world's No.3 printing machine maker Manroland have both filed for insolvency.
Not everyone is so downbeat, however. After reporting a slight rise in its business climate index this week, the Ifo think tank played down the prospects of a recession.
"Europe will end up getting a mild recession while Germany will be able to disconnect from that somewhat. We don't see any signs of a recession for Germany at the moment," Ifo economist Klaus Abberger told Reuters.
WEAK DOMESTIC DEMAND
Private consumption, which grew at its strongest pace in more than a year in the third quarter on a robust labor market, offers a glimmer of hope for the economy.
Unemployment fell more than expected in November and the jobless rate is at a 20-year low. Trade unions have been negotiating higher wages and consumer morale held steady into January on better income expectations and views of the economy.
However, private consumption is taking off from a very low level in Germany where savings levels are traditionally high and consumers wary, and it will not be able to offset the decline in investments and exports.
Economists also see downside risks for consumption because of the euro zone crisis. Metro, the world's No.4 retailer, issued a profit warning this month, saying the crisis was undermining sentiment and Christmas trade had started slowly.
Employment trends lag changes in growth and cautious German unions may be more focused on job security than seeking large wage hikes amid so much economic uncertainty.
Any small wage rises will be offset by inflation, which is stronger in Germany than the euro zone at large, market researchers GfK said, predicting consumers' purchasing power would stagnate next year in real terms.
Thus, this downturn will expose again the imbalances in Germany's economy - its dependency on external demand and the weakness of its domestic sector.
"Germany won't be able to rely on exports to drive growth and business investment will only hold up if there is a recovery in domestic demand," said Simon Tilford, chief economist at the Centre for European Reform in London.
"So everything hinges on getting domestic demand growing sustainably and there are some formidable obstacles to that."
Tilford said Germany should for example hike wages and ease back on fiscal consolidation - unlikely given Berlin is Europe's fiscal hawk.
"Germans' outlook is better than much of Europe but the idea Germany is on the cusp of a decade of rapid growth is fanciful," he said. "The outlook for German growth is pretty poor."
MEANWHILE, yet another European nation has lost its economic engine -
Hungary is having to pay more to borrow money after the ratings agency Standard and Poor’s downgraded the country’s credit score to junk.
Hungary’s rating went down from BB+ to BBB minus. The agency said it had doubts about the central bank there.
S&P said changes in the constitution had undermined the independence of the bank, and Hungary’s policy framework had become more unpredictable.
AND if Hungary wasn't enough - Greece, Ireland, Portugal, and Spain following suit, followed closely by Italy ... the worst possible for the poor French -
Dec 20 11:41 AM US/Eastern
It would be a miracle for France to retain its triple-A credit rating, threatened by the eurozone debt crisis, the head of its main market regulator said on Tuesday.
"Keeping it would amount to a miracle, but I'd still like to believe it," said Jean-Pierre Jouyet, the outspoken head of the AMF regulation agency.
Ratings agencies have warned that France is exposed to the sovereign debt crisis gripping southern Europe and have threatened to downgrade its hitherto perfect rating.
The government has protested that it has embarked on an austerity programme backed by a pact with fellow eurozone members to guarantee deficit reduction.
"I find it wholly regrettable that we are accepting the loss of our triple-A with a kind of fatalism. This loss is not banal, because it will have an effect on the interest rates the state pays," he said.
He also warned that if France was downgraded it would weaken the status of the European Financial Stability Facility and the European Stability Mechanism, two instruments set up by eurozone leaders to confront the crisis.
Any suggestion that France's debt of 1.7 trillion euros ($2.2 trillion) is becoming unmanageable could send the interest rate it pays on bonds soaring.
Earlier, the French treasury announced that it would need to raise 178 billion euros ($232 billion) in medium and long-term bonds next year.
The Fitch credit rating agency also warned on Tuesday that the eurozone's new bail-out fund could lose its triple-A debt status.
"Fitch Ratings says the 'AAA' rating on debt issues of the European Financial Stability Facility largely depends on France and Germany retaining their 'AAA' status," the company said in a statement.
"The revision of the rating outlook on France to 'negative' last Friday implies that the risk of a downgrade of EFSF debt has increased," it said.
Last week, Fitch "affirmed France's 'AAA' status but warned that there is a slightly greater than 50 percent chance of a downgrade within the next year or two.
"France is the most exposed of the 'AAA' euro member states to a further intensification of the eurozone sovereign debt crisis," it added.
Another agency, Standard and Poor's, has warned that it is re-examining France's rating and it is expected to announce a downgrade soon.
"Keeping it would amount to a miracle, but I'd still like to believe it," said Jean-Pierre Jouyet, the outspoken head of the AMF regulation agency.
Ratings agencies have warned that France is exposed to the sovereign debt crisis gripping southern Europe and have threatened to downgrade its hitherto perfect rating.
The government has protested that it has embarked on an austerity programme backed by a pact with fellow eurozone members to guarantee deficit reduction.
"I find it wholly regrettable that we are accepting the loss of our triple-A with a kind of fatalism. This loss is not banal, because it will have an effect on the interest rates the state pays," he said.
He also warned that if France was downgraded it would weaken the status of the European Financial Stability Facility and the European Stability Mechanism, two instruments set up by eurozone leaders to confront the crisis.
Any suggestion that France's debt of 1.7 trillion euros ($2.2 trillion) is becoming unmanageable could send the interest rate it pays on bonds soaring.
Earlier, the French treasury announced that it would need to raise 178 billion euros ($232 billion) in medium and long-term bonds next year.
The Fitch credit rating agency also warned on Tuesday that the eurozone's new bail-out fund could lose its triple-A debt status.
"Fitch Ratings says the 'AAA' rating on debt issues of the European Financial Stability Facility largely depends on France and Germany retaining their 'AAA' status," the company said in a statement.
"The revision of the rating outlook on France to 'negative' last Friday implies that the risk of a downgrade of EFSF debt has increased," it said.
Last week, Fitch "affirmed France's 'AAA' status but warned that there is a slightly greater than 50 percent chance of a downgrade within the next year or two.
"France is the most exposed of the 'AAA' euro member states to a further intensification of the eurozone sovereign debt crisis," it added.
Another agency, Standard and Poor's, has warned that it is re-examining France's rating and it is expected to announce a downgrade soon.
germany
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