View from City Road: No German recovery yet

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The latest report on the western German economy from the Five Wise Men is gloomy but realistic. The independent council of economic advisers predicts no growth at all in western Germany next year, even though the five economic institutes and the government itself look for 1 per cent growth. Although there have been signs of economic stabilisation, there is little indication of an upturn.

National output rose in the second quarter but much of this was due to stockbuilding, which may have stunted production in the face of weak demand. The build-up was said to be due to exporters assembling increased stocks in anticipation of higher sales. Yet there is little hope of an export-led recovery. Germany remains uncompetitive because of the strong mark and high wage costs, and Germany's main markets are still mired in recession.

Nor is it likely that consumption or investment will help. Consumption has been hit hard by higher taxes. A petrol tax in the new year and the threat of sharp increases in unemployment are likely to leave the consumer extremely cautious over the next six months. Investment, meanwhile, is in a slump. The wise men blame the investment 'crisis' on the government's inability to control public finances, but the late 1980s investment boom ahead of the single European market is as much to blame, leaving in its wake a significant overhang of capacity.

This background is likely to deliver a continuing decline in inflation, which may touch 2 per cent late next year. This should encourage the Bundesbank to cut interest rates more radically, but even so, a meaningful German recovery looks likely to be postponed to 1995.