Bad news continued to pile up for Germany and its beleaguered Chancellor Gerhard Schröder on Tuesday, as the Organisation for Economic Cooperation and Development (OECD) slashed its growth forecasts and investor confidence slid on concerns that a global slowdown could bring the stuttering German economy to a standstill.
Just a day after Schröder decided to call for an early general election in the wake of the crushing defeat of his Social Democrat (SPD) party in a key regional vote, the gloom over the eurozone’s biggest economy deepened still further.
The Paris-based OECD slashed its forecast for German growth this year to just 1,25% from 1,4% previously. And the organisation predicted that activity will pick up only slightly to 1,75% next year, far short of an earlier forecast of 2,3%.
At the same time, the influential German think-tank ZEW said investor confidence slumped to a six-month low this month as financial analysts and institutional investors fret about Germany’s unhealthy dependence on exports.
After two terms in power, Schröderand his SPD-Green party coalition has failed to make any roads into record high unemployment or steer the economy out of long years of near-stagnation, despite prescribing a raft of painful and deeply unpopular structural reforms.
Voters vented their anger over the government’s poor economic track record by booting the SPD out of its stronghold of North Rhine-Westphalia, where it has governed for 39 years.
In its twice-yearly economic outlook, the OECD insisted it is imperative not only that such reforms be implemented, but that they be stepped up further.
“For economic performance to be raised in a durable way, reforms have to be continued and deepened within a coherent framework,” the organisation wrote.
Only then will Germany be able to pull itself out of its economic quagmire.
Industry and investors alike believe a change in the government could open the way for further, accelerated structural reforms, sparking relatively strong gains on the stock markets this week.
The seemingly unstoppable flow of bad economic news is likely to nourish such hopes.
In the May reading of the monthly ZEW confidence survey, which quizzes analysts and investors about their economic expectations for the next six months, the barometer slumped unexpectedly by 6,2 points to plus 13,9 points this month, its lowest level since November 2004, after already falling sharply in April.
ZEW president Wolfgang Franz blamed the renewed fall to concerns that slowing global growth would harm German exports, hitherto the country’s sole driver of growth.
“With domestic demand still weak, the German economy is very dependent on global economic developments,” Franz said.
Just how dependent was seen in first-quarter gross domestic product (GDP) data released by the federal statistics office Destatis, which showed German output expanded by 1% on a quarterly basis in the period from January to March.
Growth was solely attributable to buoyant exports, while domestic demand contracted.
The OECD also complained that German growth is too “heavily dependent on foreign demand”.
And with signs that global growth is cooling, slower exports will likely mean that the German economy will expand by less than 1% for the whole of 2005, especially if oil prices rise again and the euro resumes its climb against the dollar.
Continued weak growth will also spell bad news for Germany’s public finances, the OECD said.
Under the terms of the European Union’s Stability and Growth Pact, eurozone countries are not allowed to run up public deficits in excess of 3% of GDP.
But Germany has breached that limit for the past three years and the OECD predicted it will do so again this year and next year.
The OECD estimated that the German deficit/GDP ratio would amount to 3,5% in 2005 and 3,25% in 2006. — AFP