The German economy is looking a little brighter, but it still has a long way to go before a recovery...
The German economy is looking a little brighter, but it still has a long way to go before a recovery takes place.
The improving global conditions should help the export industry and the tax cuts proposed for next year should stimulate the domestic situation.
However, there are still concerns that if the euro strengthens against the dollar, it will spell bad news for exports. There are also worries about deflation if consumers do not start spending.
According to Farida Hasan, global economist at Henderson Global Investors, the forecast for Germany is for stagnation this year.
The first half has seen relatively poor performance, but there has been an improvement in performance during the second half.
She thinks the global revival will help exports. Capital goods are showing signs of growth, with exports improving to Asia and the US as well as to Eastern Europe.
Hasan believes a recovery will be led by the export sector, because domestic demand is weak and consumers are not spending money.
Unemployment is still extremely high with around 4.5 million people out of work. Corporate profits have not picked up in the country. There are strict laws surrounding the hiring and firing of employees in the country. Companies do not like hiring staff because when things go wrong employees cannot be fired easily, and it is an expensive process for companies.
"Consumers are pessimistic and do not wish to spend their money and inflation is high. Unless global activity picks up there could be a deflation problem in Germany," warns Hasan.
However, the tax cuts proposed by the German government should benefit the country. For example, the government is proposing to reduce the top rate of personal income tax from 48.5% to 42%.
Hasan thinks it will be a long time before it will start to make any difference, but when it does it will help the economy.
However, Rod Marsden, European fund manager at JO Hambro Capital Management, says business indicators are proposing an upturn in the economy in the first quarter of 2003.
He warns: "The domestic situation remains difficult. But there are two issues on the horizon on the domestic side that will help improve the situation.
"First, consumer taxes are set to decrease in 2004 and there is a good deal of replacement demand. Second, as Germans have been unwilling to spend, savings have been built up and lower personal taxes should combine to produce a better spending environment at some stage."
However, he does not see a deflation problem. According to Marsden, consumers will start to buy in the motor industry. There has been low spending on German cars and both BMW and Volkswagen are set to introduce new models next year to win back demand.
Marsden expects to see exports in the industrial sector pick up, as these types of companies are more sensitive to a cyclical upturn.
According to Marsden, unemployment remains high, as there has been a transfer of production to Eastern Europe, but he sees an upturn in the service industry. There have been concerted efforts to make it easier to downsize and cheaper to employ people. The German government has become more serious about tackling these issues.
Stewart Higgins, European fund manager at Martin Currie, says: "There has been a lack of self-belief in Germany. Companies are starting to stop talking down the state of the economy, but instead they are talking up a recovery. The IFO survey indicates more positive sentiment in the country."
According to Higgins, the long-awaited tax cuts for 2004 are not only expected to help consumers but also businesses.
Companies have been taking better investment opportunities and are increasing shop hours to help encourage consumers to shop. However, he does see a risk of deflation if the economy does not pick up and thinks consumers will stop spending altogether.
Higgins warns although it would be beneficial in the long term to free up the labour market, in the short term it would be painful for the economy due to the number of immediate job losses it would create.
In addition, Higgins says the euro's strengthening against the dollar is not beneficial for Germany or the export industry. It is choking off the recovery and it could put competitive pressure on Europe.
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