Germans Face Even Leaner Times

The German government announced its economy now not expected to grow as much as previously predicted on Thursday - the same day that the International Monetary Fund (IMF) also cut its growth forecast for Germany. The final figure for economic expansion in 2002 is now expected be just 0.5% this year, down a third from the previous estimate of 0.75%. It has also revised the estimate for 2003 downwards from 2.5% to 1.5%.

In its annual review of the German economy, the IMF's left its growth forecast for 2002 unchanged at 0.5%, but cut the 2003 forecast from 2% to 1.75%.

"In 2003, GDP growth is expected to pick up, but is likely to remain weaker than previously projected and subject to considerable risks," the IMF said. "These include global uncertainties and a complex set of domestic factors."

But the reformed expectations coming out of "super-minister" Wolfgang Clement's new economics and labour ministry did not come as much of a surprise. The eurozone's largest economy has not really managed to recover from last year's mild recession, and gross domestic product only grew at 0.3 per cent in the first and second quarters of this year.

A climate of pessimism

The ministry's forecast assumes growth is now picking up and will continue to do so in 2003. However, Germany's key Ifo business climate index registered a decline for the fifth consecutive time this month, and the six leading economics institutes have also lowered their 2002 growth forecasts from 0.9 to 0.4 per cent. Their estimate for next year is also similar to the government's latest forecast.

The cure could be worse than the illness

One of the biggest problems is likely to be caused by the German Government's struggle to balance its budget.

Germany has already admitted that its deficit for this year will exceed the 3% of GDP limit laid down in EU's Stability and Growth Pact. The IMF said it expected a German budget deficit of 3.5% this year and warned that attempts to redress it too quickly could damage economic recovery.

Outlining the new government's programme on Tuesday, Chancellor Gerhard Schröder announced a range of measures aimed at increasing tax revenues and cutting expenditure. These include cuts in state subsidies for people building their own homes and a tax on investment.

"The cuts and savings agreed by the coalition are balanced," Schröder said. "They all have the sole aim of creating new scope for future investment and through it growth and employment." But many economists believe the government's plans could further depress consumer spending and thereby fuel a recession.

Big banks post losses

More bad news from the banking sector this week seemed to support that view. Deutsche Bank on Thursday posted an unexpected third quarter loss of more than 180 million euros. But an executive at Europe's largest bank said bankruptcies in Germany were only part of the reason. "Our German loan book is not the problem," he said.

Analysts said that much of the drop was caused by increased loss provisions to cover liabilities from foreign clients such as the failed US telecommunications group WorldCom and British communications firm, Marconi.

Last week, Deutsche Bank's biggest competitor, the HVB group, also reported record losses for the third quarter.

Even the news that Germany's jobless total dropped by as many as 30,000 in October is unlikely to lift the gloom. Analysts say the fall is seasonal and in any case less pronounced than in previous years.