15 October 2003

EZA 561 - Germany-Economy

German economy; evidence of firming recovery but risk of 2004 GDP growth fall toward 1%
Hard evidence of firming recovery; 2004 GDP growth may fall toward 1% if euro rises, world trade slows. Just as the German government decides to lower its growth forecast for this year to 0.25%, further hard evidence for a nascent recovery has emerged. Judging by orders and jobless numbers we think growth in 3Q03 has been marginally positive, and has continued to strengthen into 4Q03. In particular, export demand has regained some momentum, a particularly encouraging sign given the strength of the euro. Domestic demand seems generally resilient although consumption indicators are mixed. But the fact that employment has ceased to rise, implies fewer headwinds to aggregate demand from this aspect and thus a good chance that pending tax cuts will make consumption the key driver of growth in 2004. This should make next year's growth forecasts more robust than in the recent past - despite the uncertainties on exports resulting from the currency outlook and global trade. Another 10% rise of the euro would shave 0.3pts off German GDP and a deceleration of world trade by just 1pt would have the same effect. If both risks materialise, real 2004 growth will slow toward 1% vs our central scenario of 1.7% - well short of the German government forecast of 2%.

SummaryAsset Conclusions: German stock market remains supported but growth evidence now priced in. Outlook for Bunds improves due to the strong euro.

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© Graham Bishop