View from City Road: Long German haul out of recession

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The Independent Online
The latest western German figures do not justify fears of a genuine double-dip recession. The western German economy - accounting for 93 per cent of the pan- German economy - was flat in the fourth quarter. These highly provisional figures will be subjected to a more rigorous revision by the Bundesbank in March.

But, at worst, the outcome is likely to show a slight decline, especially after taking account ofthe recent flooding. The real worry is the poor recovery prospects for this year, and even for 1995.

Higher social security and oil taxes this month are expected to depress activity in the first quarter before the forces of recovery begin to gain the upper hand. Even so, these factors may be balanced out by the bounce from the effects of the flood. The outcome for the six months to March is likely to show a modest decline in output.

But it is almost certain to prove the last gasp of recession. The sharp decline in interest rates last year, and the depreciation of the mark against the dollar, will ultimately lift the economy out of the doldrums. Real long-term interest rates - a more significant economic factor in Germany than short-term rates - languish at historic lows and are already fuelling new house construction.

German exporters are also targeting the recovering Anglo-Saxon economies, especially the US, and East Asia to compensate for shrinking markets in Europe.

Against that, consumption is weak and likely to remain so for much of this year. Not only have taxes gone up but wages, as the latest chemicals industry deal attests, face serious curbs in real terms. And consumers face higher income taxes in 1995. The climb out of recession will be a slow one.