German Economy Heads Downward

13.01.2012 10:30

WSJ: Fourth-Quarter Slump Spurs Worry Over Strength of Euro Zone's Engine
BERLIN—Germany's economy contracted in the fourth quarter, putting it at risk of a shallow recession at a time when euro-zone countries struggling with their debts are looking to the bloc's biggest economy to give the region a lift.

Germany's stagnation, after two years of strong growth, could fuel further international calls for the country to stimulate growth. Economists said Germany's nearly balanced budget and ability to borrow money at low cost gives it the scope to boost growth that few others in Europe have.
But German Chancellor Angela Merkel is unlikely to switch her focus from budget austerity to stimulus measures—unless a more-severe recession threatens the country, something economists say could happen if the debt crisis in the euro zone's weaker members spirals out of control.

A worse-than-expected recession could make it harder for Ms. Merkel to persuade skeptical lawmakers and voters to support extra German funding for bailouts for struggling euro-zone countries. Germany and the euro zone's other financially stronger members may soon have to raise their lending commitments for Greece to keep the country from a messy debt default.

Ms. Merkel also fears Germany might have to contribute more funds to a financial safety net for Italy and Spain to protect those countries' ability to borrow money on bond markets.
Italian Prime Minister Mario Monti emphasized the need for more growth in Europe during a visit to Berlin on Wednesday. Without singling out Germany's vital role as Europe's economic engine, Mr. Monti said Italy's austerity measures and structural overhauls won't revive growth "unless the European framework is favorable."
Ms. Merkel is aware that Europe's lack of growth imperils euro members' quest to reduce their debt burdens, German officials said. But her government has no plans to loosen its tight fiscal policy at present, they said.

German gross domestic product fell at an annualized rate of around 1% in the last quarter of 2011, according to the German government statistics office. The slowdown in global growth and trade is hitting German exporters, while the euro-zone debt crisis has hurt German business confidence, economists said.

Uncertainty over how the euro-zone crisis will play out has led German businesses to put their investment plans on hold, said Stefan Kirschsieper, owner of tool manufacturer Walter Kottmann GmbH. "Everyone is hesitating," he said. Still, he isn't bracing for a sharp downturn and said demand from emerging economies is compensating for slumping sales to Europe's indebted south.

Forecasters are divided on whether Germany's economy will also shrink in the first quarter of 2012. Business surveys remain weak but improved slightly at the end of last year. Two successive quarters of contraction are considered a recession in Europe.

In Germany's favor: Unemployment is at a 20-year low, and consumer spending—long the weakest part of Germany's economy—has helped to offset the slowdown in exports.

"I don't see the world falling apart," said Bernd Supe-Dienes, managing partner of German machinery maker Dienes Group. His export orders are still growing thanks to strong demand in Asia, he said. But "no one knows" what impact Europe's sovereign debt crisis could have, he said, adding that he fears it could lead to a banking crisis and credit crunch.
Solid domestic demand helped the German economy to grow by 3% overall in 2011, down from 3.6% in 2010, the government statistics office said Wednesday. The full-year figure is the best that's expected for any major developed economy last year, but it mainly reflects stellar German growth early in 2011.
Whether Germany shrinks or grows minimally in the first quarter, most economists expect it to broadly stagnate before recovering slowly in late 2012. A worse-than-expected turn in southern Europe's two-year-old debt crisis could lead, via financial-market panic, to a deeper recession in Germany, analysts say.

The current slowdown isn't registering yet with ordinary Germans. The number of Germans who have a job is at an all-time high, wages are rising, and household spending remains solid.
"This is not a usual downswing," said Jörg Krämer, chief economist at Commerzbank in Frankfurt.

Consequently there is little political pressure on Ms. Merkel's government at present to stimulate growth through greater spending or tax relief, as Germany did successfully in 2009-10.

With a budget deficit of only 1% of GDP last year, far smaller than most other advanced economies, Germany has ample scope for measures that boost growth in the short term, economists said. Critics of Ms. Merkel's balanced-budget focus say Germany needs to more to do offset austerity policies in southern Europe.

While most of the Eurozone nations see their economies teeter on disaster, Germany is seeing record low unemployment. WSJ Berlin bureau chief Matthew Karnitschnig checks in on Mean Street to explain how things got so good in Germany. Photo: Getty Images.

Euro members with unsustainable debt trends such as Spain and Italy are slashing government spending in order to shore up bond investors' confidence, but their austerity measures are pushing their economies deeper into recession.

Calls for Germany to loosen its fiscal policy "are not going to cut much ice," said Greg Fuzesi, an economist at J.P. Morgan in London. Most German voters and politicians are more worried about reducing an overall national debt of about 82% of GDP than they are about a few quarters without economic growth.

That could change if the downturn worsens and threatens to reverse Germany's recent progress in bringing down unemployment.
Mr. Kirschsieper, for one, isn't planning to lay off any workers just yet, and said other German businesses are likely to try to hold on to their skilled staff through the weak patch. "Entrepreneurs are still saying 'don't lay people off, because it will be hard to get them back,'" he said.

Write to Marcus Walker and Brian Blackstone