Waiting for the upturn

Disappointing unemployment and industrial production figures and gloomy comments from analysts are highlighting the fragility of the long-awaited German recovery. All this seems to spoil the chances of Herr Schroeder's governing social democrat/green coalition to win a new term of government in the closely fought general elections on 22 September.

In the first quarter, gross domestic product grew a real 0.2 %, compared with a 0.3 % contraction in the fourth quarter of 2001. Second quarter GDP data is due on August 22. However, the Confederation of German Industry (BDI) has warned that hopes for a notable acceleration of economic growth in the second quarter were unjustified.

Despite a certain stabilisation of the stock markets, the slower second-quarter growth in the US and negative consumer sentiment are putting a damper on business, said Ludolf von Wartenberg, the director of the BDI. He predicted that a real recovery would not take place the second half of 2002, but rather next year.

So far, the German government forecast a real GDP growth of 0.75 % average this year and
2.5 % next year. Unemployment is and remains the government's Achilles heel.

The number of unemployed has started rising again after falling below four million last year. The German Chancellor's pledge before taking office in 1998 to cut the figure below 3.5 million by election time 2002 is being ridiculed by his opponents in the election campaign. Industry groups and opposition parties say Germany is now paying the price for the government's failure to reform the labour market.

The governing parties are now pinning all their hopes on the recommendations of a commission headed by former VW Personnel Director Peter Hartz aiming at halving the unemployment figure within three years. These proposals, after some watering down, have been taken up by the government and implementation will be launched later this month. It could well be, however, that Herr Schroeder's challenger, the Bavarian Prime Minister, the un-charismatic, but highly experienced candidate of the CDU/CSU parties, will earn the fruits of the Hartz initiative after September 22.

One more risk factor to German growth comes from the recent strengthening of the euro against the dollar, which may dampen German exporters' optimism. In Germany, it is generally accepted that the euro's rise is less a sign of economic recovery in 'Euroland', but rather a reflection of doubts about the US economy and a consequence of the accounting scandals. If global equity markets stabilise and growth in the US economy is returning, the euro could easily lose ground again.

On the other hand, the German Banks Federation, BdB, stated that the euro's appreciation might also help to keep inflation down and thus prevent the European Central Bank from putting up interest rates. The only certainty in today's Germany is that things will remain uncertain for the time being - like the weather.