Economic thaw for Germany: Optimism is the leitmotif of this year's industrial fair in Hanover, writes John Eisenhammer

METEOROLOGICALLY speaking, things came right just in time for the opening of the world's biggest industrial fair in Hanover this week. After a depressing plunge back into the ice age over Easter, the sun returned to stoke the thermometer and broaden smiles.

Chancellor Helmut Kohl was full of the joys of the new season in his opening speech to exhibitors. The signs of an economic spring are all around us, he enthused - even going so far as to recall his blossoming landscapes in eastern Germany.

These could be dismissed as the utterances of a desperate man. For Mr Kohl faces a general election in October and is trailing in the polls. But the Chancellor was pretty much in tune with the buoyant mood prevailing among most of his countrymen in Hanover. Compared with the mood at last year's trade fair, during which many German businessmen spent much of the time looking at their shoes, this week the talk was upbeat.

Both Hans-Peter Stihl, head of the German Chambers of Commerce, and Tyll Necker, president of the Federation of German Industry, agreed that the 'leitmotif of this fair is optimism'.

After having been administered the last rites, especially in the foreign press over the past two years, German industry is now firmly declaring that it is on the way back. When the country's leading economic research institutes present their spring report tomorrow, they will formally announce that the recession is over. They will also seek to correct all those who have been describing it as Germany's worst since the Second World War. It was not; neither in depth nor duration.

The GDP plunge that began in the second half of 1992 was certainly precipitous, but this reflected the exceptionally high levels that the economy, and mainly industrial production, had attained at the peak of the unification boom. The western German economy has gone through an ordinary cyclical crisis, says Karl Heinrich Oppenlander, head of the IFO research institute, and is emerging from it more robust.

This new sense of strength is being drawn from the successful cost- cutting offensive. Complacent German managers rightly bore much of the blame for the dramatic loss of competitiveness in the late Eighties and early Nineties, but now they should be given credit for turning things around so speedily.

The recently closed reporting season produced a picture of companies slashing costs by slimming workforces, reducing management hierarchies, introducing flexible working practices and simplifying and speeding up production. With even modest growth prospects this year, firms can look to a dramatic improvement in margins. This prospect has been one of the factors driving the stock market in recent months.

The well-below-inflation wage settlements, averaging 1.3 per cent this year, and a more flexible union approach to working arrangements have created a favourable environment for firms to pursue their rationalisation and to push unit costs down. With unemployment expected to continue rising, there are good chances that next year's wage deals will be modest too.

These efforts to claw back lost competitiveness have been helped by the powerful rise of the yen - which has wiped out much of the 30 per cent cost disadvantage vis-a-vis the Japanese that German industrialists used to complain of - as well as more recently by the gradual strengthening of the dollar.

It is optimism about exports that is now fuelling the confident mood. While the domestic economy remains weak, orders are pouring in from abroad. In the three months from December to February, the German heavy engineering industry saw foreign orders increase by 13 per cent. By contrast, domestic orders were down by 9 per cent.

On balance, the increased demand should be enough to get factories humming a little louder than last year. After a fall of 8 per cent in 1993, the IFO institute forecasts a 2 per cent increase in western German industrial production this year.

While export demand exerts an increasingly strong pull on business activity, few economists are rushing to raise their growth forecasts for western Germany this year. Many believe GDP expansion of up to 1 per cent is still the most one should hope for.

The main reason for such caution is that domestic activity is tugging a heavy ball and chain in the form of tax and social insurance increases, as well as rising unemployment.

The German Retailers' Association expects private consumption to shrink by 3.5 per cent this year, after a drop of 4.1 per cent in 1993. There are still no signs of a pick-up in investment. Until this occurs, the prospects for the next stages in the traditional German recovery pattern - higher consumption and then job creation - remain dim.

Despite the slight dip in unemployment in March, the trend remains unmistakably upwards. German businessmen may be more confident than a year ago, but they are also aware that the cost-cutting offensive is far from completed. Production continues to be shifted abroad, and jobs lost at home.

After the 600,000 jobs cut in industry last year, the Federation of German Industry expects a further 500,000 to go in 1994. Ulrich Cartellieri, a board member at Deutsche Bank, predicts that unemployment in Germany will reach 4.5 million this year and will continue rising into 1995. A real recovery on the jobs market will only come in 1996.

This hardly sounds like grounds for optimism at Hanover. But unemployment was never a favoured topic at trade fairs - especially ones sniffing the first airs of recovery.

(Photograph omitted)