In its February report, published today, the German central bank says that manufacturing industry is suffering from much- weakened international demand and high wage costs, while uncertainty prompted by recent turbulence in the currency markets has affected the willingness to invest.
But looking at manufacturing alone gives too gloomy a picture of the economy, it argues. Activity in the construction industry increased during the latter part of 1992, and the service sector has been less affected by the downturn, it says.
On eastern Germany, where there has been widespread disappointment with the speed of recovery, the Bundesbank says: 'A dynamic adjustment process has just begun. Concentration on the collapse of numerous industrial firms has partly obscured the progress being made in areas less well-represented in the statistics.'
The bank points out that, despite the slowdown, inflationary pressures 'tended rather to increase at the end of last year, at least at the consumer level'.
In January the annual inflation rate rose to 4.4 per cent from 3.7 per cent in December 1992. But the report takes heart from signs that fiscal and wage policy are 'beginning to adjust to changed conditions', welcoming the recent 3 per cent pay settlement in the public sector as a step in the right direction.
The report stresses that the easing in key German interest rates on 4 February did not represent any change to the Bundesbank's policy of stability. 'This would not have been justified' in view of inflation and money supply developments, it says.
According to the report, caution has become all the more necessary because of the 1.5 per cent drop to just below 7 per cent in long-term interest rates since last September.
This represents a considerable advance of confidence by the bank, which must not be disappointed, it warns.
The report projects a further rise in Germany's public sector borrowing requirement in 1993 to DM20bn ( pounds 8.77bn) above the DM115bn-DM120bn level of 1992.
However, the estimate does not include new borrowing by the Treuhand privatisation agency, German railways and the post office, which together amounted to 2 per cent of GNP last year.Reuse content