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01 September 2003

EZA 552 - Germany-Economy




Euro, investment, credit to hamper German recovery
The German recession has ended in 3Q03 but the initial recovery is likely to be anaemic, given the delayed impact of past euro strength on German exports. A genuine upturn will come only in 2004 when the recent dollar rebound and growing momentum of the US/Asian economies help brighten the outlook for external trade. We are forecasting 2004 real GDP growth at 1.7%y/y vs flat in 2003, and the euro area at 2% next year. The main contribution should come from private consumption, boosted by tax cuts and a moderate decline in unemployment. The Agenda 2010 structural reforms to be legislated soon by the government of Chancellor Gerhard Schröder will help domestic demand in the longer run even if their initial impact on wages and social benefits should moderate growth. Yet structural changes in the banking system are likely to moderate any expansion. Small and medium size companies (Mittelstand) are still encountering limited availability of credit as banks restructure balances sheets. All this makes a repeat of the the late 1990s seesaw pattern for the German economy the most likely scenario for the conventional forecasting horizon.

SummaryAsset conclusions: Hard evidence for growth is positive for equities, limiting setback risks, but negative for bonds and ECB rate outlook

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© Graham Bishop

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EZA552.pdf


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