Tremors as giants stumble: The spectre of a worldwide recession is taking shape as Germany's fortunes fall and the US slides towards an economic relapse

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The Independent Online
IT WOULD be hard to think of a better caricature of the US economy than Moe Schoenberg. Like millions of Americans who wanted to believe in the Clinton recovery, Mr Schoenberg bet heavily on the prowess of the new US President. Hoping to 'get in on the ground floor' of a boom, he decided to stop delaying the expansion of his business.

Now, like all the other sidewalk vendors who hawk souvenirs at the quayside of New York's Battery Park, Mr Schoenberg is having trouble moving Bill Clinton memorabilia. Few people are interested in being photographed beside his large cut-out of the President, or for that matter, in buying the Clinton/Gore key-chains or Hillary mugs he had made 'at great expense' in the Dominican Republic. He says he hasn't sold a Bill Clinton T-shirt in six weeks to the tens of thousands of tourists who pass his stand.

Mr Schoenberg is one small example of the sudden gloom that has returned to the US economy in the past few days. On Wall Street, there are already fears that the faltering recovery may even tip back into a 'triple dip' recession.

At the same time, German industry is rushing deeper into its own downturn. To the pessimists, stuttering recovery in the US together with recession in Germany represents a more severe danger to the world economy than anything faced since the latest recession began.

'If the US did actually relapse, the prospect would be for protracted global recession,' said Gerald Holtham, chief economist of Lehman Brothers International.

For Britain's own delicate recovery, a simultaneous downturn in Germany and the US could spell disaster. Some 15 per cent of UK exports go to North America, while 25 per cent go to Germany and France. Without the strength in domestic consumer demand to engineer a home-grown recovery, Britain's upturn depends on exports. But with its major overseas markets going sour at the same time, hopes of an export-led recovery begin to look forlorn.

For 'Mr Mercedes', it could hardly be a more miserable time to go. Werner Niefer retires as chief executive later this month, leaving Germany's automobile giant reeling from its harshest crisis in decades. 'We Germans have quite simply lived too long in the lap of luxury, not noticing that things were moving away from us. Unless there are changes, we shall run into big problems as an industrial nation,' he said.

To many, his use of the future tense seems like a cosmetic nicety; the problems are already here. Having spent the past year trying to insist that some kind of recovery was on the way, even the government in Germany has finally had to give in to the overwhelming gloom.

The 'worst recession since the war' has now received the official stamp of Gunter Rexrodt, the economics minister.

Just six months ago, in their autumn forecast, the country's leading independent economic institutes said pan-German GDP would rise by 1 per cent in 1993. Last week, in their spring report, they revised this forecast to a fall of 1.5 per cent.

A further batch of key indicators this week showed unemployment continuing its relentless rise, while the decline in the value of capital goods in February to March 1993, compared with the same two-month period a year ago, was an awesome 17 per cent.

'Where firms were used to working with order books filled for three to four months, they are now down to about 14 days. The consequences will continue to come through in falling production and rising unemployment,' said Gert Schmidt, senior economist at IKB Deutsche Industriebank, which specialises in financing medium-sized businesses.

The gloomy message of these indicators has shocked many economists. 'The kind of recovery we shall see next year will be very, very weak,' said Richard Reid, chief European economist with UBS. 'But if this sort of data persists then it will cast doubt on any recovery at all.'

Unlike the recession in the UK, the German downturn has hit manufacturing particularly hard. Because of its importance - industry accounts for more than 40 per cent of western German GDP - the entire economy has been traumatised. The IFO institute in Munich expects a 7 per cent decline in western German industrial output this year.

The pillars of Germany's manufacturing prowess - automobiles and chemicals - are being shaken to a degree not seen in the past 40 years.

'At Mercedes, we probably have more of a struggle than in other firms because we were for years spoiled by the market,' said Mr Niefer.

To restore profitability, German manufacturers are rushing to cut costs - with dramatic effects. A recent report by consultants Price Waterhouse predicts that of the 3,000 automobile suppliers currently in Germany - most of them classic mittelstand firms - only about 500 have a good future. Meanwhile, the exodus continues as firms shift sourcing and production to lower-cost countries.

The pessimism on the factory floor has finally fed through to the high street. The consumer climate index, measured by the Nuremberg Institute for Consumer Research, has reached its lowest point since the Second World War.

Real wage cuts, fears of unemployment, and widespread foreboding about impending increases in a range of taxes, duties and social insurance contributions are taking their toll. 'Clearly, the evidence is there that the recession is spreading to the services sector and other parts of the economy,' said Richard Reid of UBS.

While Germans have been shocked by the strength of their recession, Americans have been caught out by the feebleness of their 'recovery'. Like many other US businessmen facing the unexpected slump in demand this spring, Mr Schoenberg is sitting on record inventories, delaying plans to hire new staff, and suddenly worried about foreign customers.

His former over-enthusiasm seems to be a generalised problem among US businessmen. After a booming fourth quarter when America's GDP rose at an annualised rate of 4.7 per cent, growth slipped in the first three months of this year to 1.8 per cent - and all of that growth was accounted for by a dollars 26bn ( pounds 16.5bn) increase in the sort of inventories that have sapped Mr Schoenberg's savings.

Exports have weakened, manufacturing shrank in March for the first time in seven months, and the leading economic indicators for that month registered their worst drop in two-and-a-half years. Retail sales and employment figures for April, released last week, look decidedly disappointing.

'A triple dip recession? We're in it,' said Philip Braverman, chief economist with DKB Securities in New York. 'We've been suffering under the delusion that there is nothing seriously wrong with this economy, nothing that some good talk from (Federal Reserve chairman Alan) Greenspan and some business confidence couldn't repair.'

A succession of special events - a record hot winter in 1991-2, pump-priming by ex- President George Bush last spring and a rush last December to avoid Mr Clinton's planned taxes - 'have given Americans the mistaken view that things are much better than they really are', said Mr Braverman. 'Burdened with debt, the American economy is in fact just ticking over, with unsteady growth of only 1.5 per cent a year.'

The views of Leon Panetta, the White House budget director whose pessimistic comments became a source of some embarrassment to the President two weeks ago, are similarly gloomy. 'We continue to run the danger that we are not going to be able to move the economy forward,' he said.

But not everyone on Wall Street has given up hope. 'Triple dip? Why not a quadruple dip?', responded Larry Veit, economist with Brown Brothers Harriman, a New York investment advisory firm.

'My domestic colleagues have a tendency to grab every quarterly number that comes out and multiply it by four,' he argued. Nobody promised there would be 4.7 per cent growth.

What America has now is what it had before this rash of misleading figures, said Mr Veit: a modestly growing economy that will probably show a gain for 1993 of between 2.5 and 3 per cent.

The US business community does not appear to have plunged deep into the gloom just yet. But the perception of a suddenly weaker economy is a double-edged sword for the Clinton administration, whose arguments for dollars 20bn of public spending on jobs and infrastructure to 'jump-start' the economy now seem vindicated. On the other hand, if the apparent stagnation persists into the summer, Mr Clinton will lose his hard-won following among business people. It is all a long way from the post-election optimism on Wall Street.

(Photograph omitted)

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