The European Crisis: German economy loses its edge

THE PROSPECTS for the German economy have deteriorated considerably, according to the Federation of German Industry (BDI). 'There are no signs at all of the previously forecast recovery in the second half of this year,' wrote the BDI in a report yesterday, writes John Eisenhammer.

The indicators for June and July turned out to be 'far worse' than had been expected at the beginning of the year. The current trend in order books taken together with the survey of firms' expectations point towards a 'further worsening of the economic situation', declared the BDI.

International demand - 'the most important support for economic growth this year' - has failed to perform its expected role. A combination of a weak world economy and a marked deterioration in German competitiveness, through rising unit wage costs and a sharply appreciating currency, have created a 'negative trend in exports', wrote the BDI. A US investment bank, Salomon Brothers International, says 'the western German economy has been brought to the verge of recession by the sharp appreciation of the deutschmark'.

The miserable mood in the economy has been sharpened by the latest figures on growth in the money supply. Germany's had expanded at an annual rate of 9 per cent in August, up from 8.5 per cent in July, dashing hopes that the Bundesbank's tough interest rate policy had finally reversed the growth trend. The massive selling of deutschmarks over the past fortnight, first in an attempt to save sterling and the lira in the ERM, and now the French franc, will have given another enormous boost to money supply growth, which the Bundesbank is unhappy about.

On the economy in eastern Germany, the report said that earlier optimistic forecasts 'must all be revised radically downwards. It remains difficult to identify with any clarity the process of structural adjustment'.