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Analysis: German economy tentatively enters new year

The German economy has tentatively entered the new year with a raft of key data underscoring concerns that the nation has been losing economic momentum.

While November production and retail sales figures released Wednesday pointed to a slowing domestic German economy, trade data for what is the world’s leading export nation pointed to the strong euro hitting the country’s export machine. But the data released Wednesday also came in the wake of figures showing key German factory orders unexpectedly surging for a second consecutive month in November on the back of strong demand from within Germany and its partners in what was then the 13-member eurozone.

Moreover, despite revising down their 2008 German growth projections to under 2% from about 2.5% last year, economists remain confident that Europe’s biggest economy will remain on an expansion path this year after rebounding from a protracted period of stagnation in 2006. “In our view, Germany is on its way to becoming the new growth locomotive in Europe,” said Elga Bartsch, European economist with Morgan Stanley. “Yet, the German growth locomotive might be pulling a slow train given the global headwinds that are gathering momentum.”

Indeed, the new year has begun against the backdrop of concerns about the prospects for US growth and worries that the impact of the credit crunch unleashed by the US housing sector crisis has not yet been fully felt both in the international economy and global financial markets. In particular, data released around the world since the start of 2008 have confirmed worries that high food prices and record energy costs have been fuelling inflationary pressures just as the United States appears to be dangerously close to slumping into recession. The release of the latest batch of key German economic data also comes in the run-up to the start of the latest reporting season for the nation’s corporate sector. But echoing the views of many economists, Bartsch insists that Germany was not heading for a recession. “On the whole, the German corporate sector should weather a potential credit crunch better than its European peers,” she said.

Nevertheless, there is concern in Europe that world economic growth could slip back a gear just as the surge in the euro undercuts exports. The common currency jumped by more than 10% last year. The German statistics office said Wednesday that exports in the country slipped 0.5% month on month in November as the euro powered ahead to an all-time high just short of $1.50 and inflation helped to fuel economic uncertainties. Analysts had expected German exports would repeat the increase in October and rise by 0.5%, with strong demand from the world’s booming emerging economies having helped to power German exports in recent years. This also forms part of a wider debate about whether continuing solid demand for European exports from the world’s booming emerging economies in Asia, the Middle East and Eastern Europe could carry the European economy forward and even help Europe to decouple from the US, the world’s biggest economy.

Tuesday’s data showed a solid 6.8% jump in orders from Germany’s partners in the eurozone helping to power foreign orders. “The positive trend for foreign orders from the mechanical engineering sector remains unbroken despite it facing additional burdens,” said Ralph Wiechers, chief economist of Germany’s mechanical engineering association (VDMA) on Wednesday. The VDMA said foreign orders for German mechanical engineering companies rose by 11% in November compared to the same month in 2006 indicating the continuing strong demand for infrastructure developments around the world. Carmakers along with other key German industrial sectors have also been cautiously optimistic about their 2008 business prospects with luxury carmaker Audi saying Wednesday China had now become its biggest export market. But analysts had also been expecting a pickup in German wages and falling unemployment to shore up private consumer spending in the nation this year and a result offset a slowing world economy.

However, official figures showed retail sales slumping unexpectedly in November, raising the prospects of a less-than-solid start to the year for the nation’s retailers. Retail sales are predicted to fall between 1.5 and 1.8% for the whole of 2007 in real terms. The release of the data followed comments from German retailers about a disappointing Christmas shopping period. In the meantime, German industrial production also recorded a surprise fall in November, contracting month on month by 0.9% after edging up by a marginal 0.1% in October. Analysts had predicted a 0.4% rise in industrial production during November. (m&