Signs point to German recovery

ECONOMICS - THE WEEK IN VIEW

Economic reports this week are expected to show that the outlook for domestic demand in Germany is starting to improve. Unemployment is seen falling slowly back from its record highs, while manufacturing orders are expected to have risen on strong foreign demand.

New orders for Germany's manufacturing industry probably rose 0.4 per cent in March from February and gained 4.9 per cent from a year earlier, economists believe.

Consumers are also expected to spend more as job security concerns ease along with falling unemployment. Economists say the unemployment rate in Germany fell to 11.4 per cent in April after retreating in March from February's postwar high. Figures will be published on Wednesday.

"We're now in a stage where domestic demand is starting to kick in," said Joachim Fels, economist at Morgan Stanley in London. "I'm expecting to see strong signals for a rebound in the next few months."

German companies are benefiting from the 11 per cent decline in the deutschmark since the start of the year that has made their goods cheaper in foreign markets. Favourable exchange rates helped German companies record an export surplus of DM9.2bn (pounds 3.3bn) in February, up from a DM5.6bn trade surplus in January, the Federal Statistics Office said.

Steel and machinery maker Fried. Krupp said it expected improved earnings in 1997 as global demand compensates for a weaker domestic market. The company said new orders rose 5.6 per cent in the first quarter.

Machinery and telecommunications company Mannesmann said last week that first-quarter sales rose 14 per cent from the year-ago period to DM8.2bn on healthy new orders.

German manufacturers saw new orders rebound in March thanks to increased demand for capital goods in Germany as the country's economic recovery gathers pace.

While demand for machinery and other capital goods is set to rise, analysts said they expected orders for consumer goods to recover more slowly as joblessness retreats only gradually.

The number of German unemployed probably fell by 10,000 in April. Even that small decline is the result of seasonal influences, such as increased construction, rather than any real reduction in jobless. Analysts said Germany's near-record level of unemployment will persist throughout the year.

"Industry still has so much extra capacity, it can operate quite well without more personnel,"said Peter Meister, a labour market economist at BHF-Bank. But he said he expected another seasonal fall in unemployment.

Germany's high unemployment has cast a shadow over consumer confidence and left companies and retailers with little scope to pass on higher prices to customers. Weak domestic demand has helped keep the country's annual inflation rate below the Bundesbank's long-term target of 2 per cent since May 1995.

However, optimism among businesses seems to be improving, with German wholesale sales rising an inflation-adjusted 6.7 per cent in March from February, show Federal Statistics Office data released on Friday.

But wholesale sales were down 3 per cent from last year as sales of consumer and durable goods fell, as did sales of machinery and equipment. Those falls outweighed a rise in sales of raw materials and semi-finished products. Copyright: IOS & Bloomberg