View from City Road: Bundesbank asks for caution

The Bundesbank talked up the western German economy during the darkest months of the recession. Now it is damping down expectations of quick recovery. Its December monthly report says the timing of a durable recovery 'must remain completely open'. Despite believing that the trough has been reached and may even have been passed, the central bank says caution is the order of the day.

It points out that capacity use in industry has continued to decline, and the type of demand required for quick recovery is missing. The German economy has traditionally been driven by exports, but until key European markets pick up, there will be little to power expansion. Weakness in foreign markets has a delayed impact.

The biggest improvement so far in the economy has been a seasonally adjusted 1 per cent rise in western German industrial production between July and October. This has been fuelled by private consumption. Rather than go without, Germans have been dipping into their savings. But with fiscal tightening on the way and fast-rising unemployment eroding purchasing power, there is doubt about how long this can last.

On a positive note, the Bundesbank draws attention to sharp slowdowns in inflation and monetary growth in recent months. Prices were rising at a seasonally adjusted annualised rate of 2.5 per cent between August and November, while M3 money supply growth has risen at a seasonally adjusted annualised rate of 5.5 per cent over the last three months, compared with 8 per cent between May and July.

The weakness of the recovery is unlikely to lead to an immediate interest rate fix. Having gone to the unusual length two weeks ago of fixing its repo intervention rate in the money market until January, the Bundesbank will be loath to ease rates tomorrow, at its last central council meeting of 1993.