Outlook for '99: Bonn - Germany to go slow

The view from the world's economic hotspots
Click to follow
The Independent Online
GERMANS are bracing themselves for a great deal of uncertainty in the coming year. The new government, still apparently unclear about its economic priorities, will be moving to Berlin after the summer. However well planned the project has been, disruptions are inevitable. This comes at a time when the nation which almost defines itself by its currency tries to get accustomed to the euro.

Besides the pyschological impact of all these novelties, the economy will be put under strain by global developments. 1998 was the year when Germany, defying all predictions, shook of the effects of the Asian crisis. In 1999, the forecasters say, German industry will no longer be able to shrug off increased competition in Asia and collapsing markets in Russia and Latin America. While some industries, notably car manufacturing, will hardly notice the difference, others, such as chemicals and engineering, are set to take a beating. The country's spectacular export-led growth will be hit as exports are not expected to maintain last year's frenetic pace.

The prestigious IFO institute, for instance, predicts a growth rate of 1.7 per cent for 1999, in contrast to the 2.8 per cent achieved last year. The slowdown will be barely noticeable in the east, where the economy expanded by about 1.8 per cent in 1998, and might drop to 1.5 per cent in the coming year. In the prosperous west, though, growth is expected to drop from 2.9 per cent to 1.7 per cent.

These figures assume that capital investments are maintained at their present moderate levels, and that the current mini-boom in the consumer market - fuelled largely by the diversion of savings - will continue into next year. It is not a very rosy outlook, but it could have been worse. Despite the slowdown, forecasters are expecting a slight fall in unemployment, perhaps by 250,000, bringing the number of jobless to about 4 million by the end of 1999. The wholesale downsizing of the past two years seems, for the moment, to be over. The re-emergence of the building sector from its doldrums, after a 4 per cent contraction in 1998, could account for many of the new jobs.

The forecasters are making all these predictions in the absence of any real inkling of government intentions. To some extent, higher energy costs caused by the Red-Green government's eco-tax have been factored in. What has not been reckoned with is the impact on wages. The unions, citing the higher cost of fuel, are already pushing for pay rises of up to 6.5 per cent. The final settlement will of course be considerably lower, but any rise will endanger the competitiveness of companies already operating on paper-slim margins.

Oskar Lafontaine, the finance minister, is due to unveil his tax reforms in the middle of February. From what he has been saying so far, the benefits, if any, may not start to filter through the economy until the year 2000.