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The German economy is not working. It stagnated over the summer and shows few signs of gaining momentum. A decline in retail sales, weaker manufacturing output and a rise in unemployment point to slowing growth - and even contraction.
The European commission’s latest growth figures show the GDP increased a meagre 0.3 per cent in the second quarter after 0.4 per cent in the first. More worrying, it scaled back its expectations for the rest of the year, with third and fourth quarter growth rates in a narrow 0.3 to 0.6 per cent range. Earlier this year, the European Central Bank was still optimistically talking about the eurozone achieving 2 per cent growth in the second half of the year. That now seems a distant dream. The average growth rate is now unlikely to exceed one per cent.
Confidence surveys, meanwhile, have compounded the growing sense of gloom. The closely watched IFO business sentiment survey for Germany dropped for the third month running. In August, both the manufacturing and the service sector surveys revealed that they were only fractionally above the mark that divides contraction from expansion. A year ago hopes were high that growth rates in the eurozone would outstrip those in a US mired in recession after the September 11 terrorist attacks in New York.
Over the past few months the single currency has even strengthened, touching parity with the dollar in mid-year as the investors’ concerns about the US economic and corporate performance mounted. Some European policy makers were quick to point to the eurozone’s balance current account, low budget deficit and the lack of corporate accounting scandals as signs of strength of the region’s economy.
Since 1996, the GDP growth has averaged 1.6 per cent a year in Germany as compared to 2.8 per cent in the rest of the eurozone. This year Europe’s largest economy, which accounts for almost one-third of eurozone output, is expected to grow an anaemic 0.6 to 0.7 per cent — and that included a shallow second half recession.
Domestic demand has been falling for the past four quarters. Consumers have stopped spending, deterred by price rises in the shops in the wake of the euro cash changeover and the fears of steadily rising unemployment. Investment in machinery and construction has fallen through the floor amid fears of a renewed global slowdown. It fell 2.5 per cent in the second quarter after one per cent in the first.
Meanwhile, wage pressures have been mounting and the badly needed tax cuts have been postponed to fund reconstruction in the wake of August’s devastating floods. German exporters, the engine of the economy, owe much of their competitive edge to the euro’s recent weakness. But a stronger euro will curb exports and, as a result, the GDP growth. Every 10 per cent appreciation in the euro reduces eurozone GDP roughly one percentage point.
Switzerland is now a very different country from the one it was in 1986. It is not part of the European Union and shows no interest in joining either Nato or the euro currency, but it is much more integrated and open to the world than it was 20 year ago.
A big part of the reason is economic. Switzerland may be one of the world’s most politically introverted countries with a population smaller than the Germany’s Bavaria or Baden-Wurttemberg. But it is one of the world’s top 10 foreign investors and ranks among the top 20 in terms of international trade. Its industry and financial institutions are much more international and far from immune to the problems that affect the Europe’s leading economies and corporations.
While its economic lead over most other OECD countries has dwindled over the past 20 years, it still boasts an above-average number of successful multinationals, such as the Novartis, the Nestle, the UBS and the Swiss Re. It also has one of the lowest unemployment rates of any industrialized country. The big difference, compared with 10 years ago, is that Switzerland has realized that it can no longer cut itself off from the rest of the world’s problems.
The economic recovery forecast in the spring will be delayed by two to three quarters. Most private forecasters had downgraded their forecasts earlier, in line with the more pessimistic outlook for the world economy and the strength of the Swiss franc which has taken its toll on export deliveries and profitability as well as tourism. Exports, which account for over 4 per cent of the gross domestic product and drive the Swiss economic cycle, are expected to stagnate or even fall this year.
