Economists, Industry Pin Hopes on 2005

Once upon a time, Germans were accustomed to reading articles full of hope, enthusiasm and healthy earnings when they’d open the business pages of the newspaper. But since 2001, the financial sections have read more like the obituaries page.

The number of business failures has skyrocketed, along with the unemployment figures. Stocks have generally headed in the opposite direction, along with business and consumer confidence.

But analysts say 2004 marked a slight improvement in the German economy’s fortunes, or at least a leveling out of the freefall it had been in for three years. Now experts from several leading economics institutes are forecasting 2005 could bring the economy further out of the doldrums.

“German industry is in a good mood right now,” said Udo Ludwig, economist at the Halle Institute for Economic Research. “Stock market developments in 2004 were pretty good and as long as profit expectations stay healthy, the mood among companies shouldn’t get worse, probably a little better.”

A recent survey of 43 economics associations carried out by the Institute of the German Economy in Cologne found that 22 were feeling better now than they did a year ago. Only eight said they felt worse off; the rest reported their mood was unchanged. The majority said they planned on producing more in 2005 and would increase or at least maintain the level of 2004 investments in the coming year.

“The prospects for the German economy in 2005 are excellent,” wrote Chancellor Gerhard Schröder in an article in Germany’s Handelsblatt newspaper on Thursday. Schröder’s finance minister echoed the sentiment, telling the Financial Times: "2004 was a good year, because the German economy finally moved out of stagnation."

The government has forecast the economy will grow at 1.7 percent in 2005, a more optimistic outlook than that of most of the country’s leading economics think tanks. Several have actually lowered their growth forecasts for the coming year.

“We can’t expect a lot,” said Joachim Scheide, who analyzes business cycles at the Kiel institute. “Unlike some others, we’re rather pessimistic.”

Driving factor: exports

That pessimism has much to do with the decisive role exports play in the German economy. Much of the improvement in 2004 was due solely to exports, which roared ahead in the first half of the year, and there are hopes that that level can be maintained in 2005.

“Exports will continue as they have been for a while, and then the domestic situation will slowly pick up,” said the Halle institute’s Ludwig.

Others aren't so sure. The International Monetary Fund in Washington has forecast global growth with slow to 4.3 percent next year from 5 percent in 2004. That means demand for exports could sink, which could put a drag on German growth overall.

Euro, oil prices surge

After a year in which the US dollar fell 5 percent against the euro, many are worried that a further climb will prove damaging to the German economy. The European common currency peaked at $1.3667 in December and media outlets in 2004 were full of reports of companies suffering under a rising euro.

Many worried that the strong euro, along with record high oil prices last year, would nip that Europe’s nascent recovery in the bud. But oil prices have stabilized somewhat and European companies have not suffered as much as expected from the strong euro.

If the euro-dollar exchange rate stays around where it is, or even better, drops to around $1.30 in 2005, German exporters should remain competitive enough to succeed in global markets, according to the Chambers of Commerce.

“We can’t ignore it, but we shouldn’t overrate it,” said Michael Grömling, an analyst with the Cologne Institute of Business Research. “The development was partially predictable and German companies have managed.”

Go to page two to read how reforms to Germany's highly regulated labor market have given industry leaders a dose of good cheer.

Reform cheer

One reason behind the new optimism among industry leaders is the Schröder government’s controversial labor market reforms that have now gone into effect. They are aimed at boosting the economy and putting a dent in German’s unemployment rate, now at over 10 percent.

“The reform program in Germany has improved the business mood here substantially,” said Grömling.

Most economists don’t expect the reforms to have a big effect in 2005, but they say it might cause a small improvement in the labor market and set the foundation for a larger turnaround in 2006. That, in turn, could improve consumer spending, which has been the Achilles' heel of the German economy for several years.

“Consumption goes hand in hand with labor market developments,” said Grömling. “It won't get worse; it could get better.”

Still lagging behind

Although there is some cautious optimism going around these days, it's not shared by everyone. The world economy is growing faster than it has in 28 years, but the German economy is not part of it, complain economists at Munich’s Ifo economics institute and several leading banks.

“Germany is disconnected from the world,” said Martin Hüfner, chief economist at the HypoVereinsbank in his New Year’s commentary. “No other country in central or western Europe has grown as slowly between 1995 and 2004.”

While Germany used to be called Europe’s economic powerhouse, these days caboose is more like it. Despite the improvements, some economists say the last-place position is not likely to change.

Joachim Scheide from the Kiel institute says for that to happen, Berlin is going to have to institute far-reaching reforms and consider a more aggressive strategy for boosting growth.

“We need the state to invest more and to really lower taxes so that the private sector has breathing room,” he said. “2005 might turn out to be a slight improvement over last year, but more simply must be done.”