Germany headed for near-stagnation, think tanks say

Eight leading European think-tanks have forecast growth in Germany’s economy will all but stop next year, generating just 0.8% expansion as the weight of financing its troubled neighbours takes its toll.

It is a sharp revision to the prediction of 2% expansion in 2012, which the same group made six months ago.

Germany’s economy grew by 3.6% last year, easily outpacing its neighbours.

“The debt crisis in Europe is threatening to become a banking crisis, which is increasingly weighing on the German economy too,” the group said. The group comprises German institutes IWH, Kiel Economics, Ifo, IfW, RWI and ZEW, and Zurich’s KOF and Vienna’s IHS.

Strong exports with a weak euro have supported Germany so far through the crisis, but Europe’s largest economy cannot withstand its neighbours’ current malaise forever, the group said.

“In the middle of 2011, the outlook for the world economy deteriorated sharply. In Europe, the debt crisis is broadening out into a banking crisis. This is increasingly affecting the German economy,” the institutes said.

John Greenwood, chief economist at Invesco (pictured), said: “The eurozone’s powerhouse is now teetering on the brink of recession.”

After peaking at 110.7 in February, the Ifo index of German business expectations over six months fell to 98 in September.

The two sectors that Greenwood said “dragged it down” – weak orders in manufacturing and construction – were the same two areas that had boosted German real GDP to 4.6% year-on-year in the first quarter, Greenwood added.

“Past changes of this magnitude have signalled either a recession, or at least a period of economic stagnation. On the all-important export side there are also signs of a slowdown.”

Greenwood predicts eurozone GDP growth to slow to 1.6%, “concealing a wide divergence of performance between a slowing core and a stagnant or contracting periphery”. Headline inflation will be 2.4%, in his view.

Just one day after the final eurozone member – Slovakia – finally agreed expansion of the bail-out fund, Greenwood became the latest to say the €440bn rescue pot would not be big enough.

Germany’s chancellor Angela Merkel and France’s Nicolas Sarkozy must push for more expansion – which would, however, entail a bigger invoice for each nation, he said.

“The €440bn EFSF is simply not large enough to address illiquidity or insolvency on this scale. Moreover, this solution does nothing to address the underlying lack of competitiveness in the region.”

If political leaders push, instead, for Greek default and exit, or for prolonged austerity and inflation in peripheral nations, the result in Greenwood’s view is “a widening recession in the eurozone as the symptoms of recession in the periphery and higher interest rates are progressively transferred to the stronger creditor nations.

“How deep the recession becomes depends on the severity of the financial crisis in the Eurozone. That in turn depends on what happens to Italy and Spain-both too big to fail, but also too big to be saved by the €440bn EFSF.

“Over the next few weeks the eurozone leaders – essentially Merkel and the Germans – must commit to backstop the Eurozone with a facility that is several times larger than the current EFSF. If they do not, or if they hesitate, some states may lose the ability to refinance their debts and the Eurozone and many other leading economies will be plunged into another deep, protracted recession.

Referring to Slovakia’s stuttering attempts to pass EFSF expansion, Stefan Angele, head of investment management at Swiss & Global Asset Management, said: “To see how easily local political manoeuvers can threaten the stability of the entire region does certainly not help to increase confidence in the eurozone’s capability to act decisively under its current institutional framework.”

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