Germany admits inability to cut deficit below 3% by 2004, increases urgency for reform process
The German government admitted last weekend that it would not be able to fulfill its pledge to reduce its deficit below 3% of GDP in 2004 and balance its budget by 2006. The German government’s admission that the deficit will exceed the Maastricht limit of 3% of GDP for the third year running in 2004 had little market impact because market participants have been expecting this for a while. The European Commission may eventually propose a fine on Germany under the EU’s Excessive Deficit Procedure. Slow growth is at the heart of Germany’s fiscal difficulties, with virtually all recent economic statistical releases showing worse-than-expected growth prospects. At the same time, Germany’s fiscal problems have increased the urgency of the labour market and pension reforms proposed by Chancellor Gerhard Schröder. Eurorostat will release a flash estimate of German GDP growth on Thursday for the first time.
The estimate should show near-stagnation (0.2% q/q growth) in 1Q03. We stick to our earlier forecast of 0.5% GDP growth, but view this estimate as an upper limit this year in view of the euro’s appreciation.
SummaryAsset Conclusions: Slow growth and falling inflation will put further downward pressure on Bund yields, despite Germany’s rising borrowing requirement
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© Graham Bishop
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