German economic winter shows first signs of thaw

Although you might need a microscope to spot them, the green shoots of recovery are becoming visible in Germany, raising hopes that the slump of recent months would, as the government predicted, be temporary.

Figures released yesterday by the German Economic Ministry show that industrial output bounced back in April by a seasonally adjusted 1.4 per cent, fuelled largely by a powerful surge in the building sector. In the former East Germany, construction activity expanded by 13.2 per cent, although it registered little change in the west.

Improving performance was reflected in the jobless figures. Seasonally adjusted unemployment fell by 62,000 to 3.93 million in April, the first drop in nine months.

The latest figures add to the trickle of statistics indicating that the worst might be over for Germany. Last week the first rise in foreign orders was detected since the end of 1995, and the IFO research institute's business confidence index has also started to climb.

Nevertheless, Gunter Rexrodt, the Economics Minister, warned yesterday that the "growth pause", as the government describes its mini-recession, may not have run its full course. "But the normalisation of the mark and wage moderation in many areas give us hope the economy will come out of its weak phase and return to growth in the medium term," Mr Rexrodt said.

Most economists agree that Germany has been in the middle of an M-shaped curve, with growth inevitably resuming after six months in the doldrums. So far, the cycle is on target. The Federal Statistics Office confirmed yesterday that the economy had shrunk in the first quarter of this year, following a downturn in the last quarter of 1995. By Anglo-Saxon standards, two successive quarters of negative growth add up to a recession, but Bonn insists on a less rigorous definition.

Either way, the government had budgeted for stagnation, and received instead a 0.5 per cent fall in the two successive quarters. The discrepancy is blamed on the long, hard winter, which froze the building sector. The question is whether the latest upswing should be attributed to the sunny weather or to economic recovery.

The government points to an improving economic climate, especially the falling mark and interest rates that are almost at a historic low, as evidence of a fundamental shift in industry's favour. Destocking, which suppressed demand through the winter, also seems to be over.

But whether all these circumstances will add up to a surge that will make up for the losses of the last six months is a subject of heated debate among economists. Official forecasts for this year's overall growth rate have been revised downwards several times, to a paltry 0.5-0.9 per cent.

Next year's performance will be crucial. Anything less than the 2 per cent forecast by the government would leave a large shortfall in revenue, thwarting German efforts to meet the Maastricht criteria for European Monetary Union.

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