EZA 521 - Germany - Economy

17 April 2003

German Banks to Slow Economic Recovery
German Bank Balance Sheets to Hinder Economic Recovery Probably for Next Two Years

SummaryAsset Conclusions: Weak German bank balance sheets to keep economy underperforming for next two years; underweight German assets now.

Contents
The weakness of German bank balance sheets will prove an obstacle for a recovery in macro-economic recovery for at least the next two years. It is significant that the six leading German economic institutes in their spring statement on Tuesday cited a variety of economic and structural reasons for the current stagnation in German bank lending, stating that the signs of a credit crunch are 'not unequivocal.'

References to micro-economic factors are unusual in the institutes' forecasts. They see weak performance of German bank and insurance equtieis as a signal of possible systemic factors behind the extreme weakness in bank lending. We think this trend may be sustained at least throughout this year, and will help to extend the underperformance of the German economy well into 2004.

This structural factor will keep downward pressure European Central Bank interest rates for some time yet, and also slow any potential euro area recovery. The institutes forecast German real GDP growth for 2004 at 1.8% vs 2.3% for the entire euro area.

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© Graham Bishop