Germany Faces Declining Growth

Two weeks ago, Wolfgang Muchau of the Financial Times forecast that the German economy would contract between 2 and 4% in 2009. What looked to some like an offbeat forecast has now become conservative. Last week, two of Germany’s large economic institutes forecast a decline in growth for 2009 of 2 and 2.2%, respectively. Norbert Walter, chief economist of Deutsche Bank (DB), said a contraction of 4% in 2009 was possible. Some believe the contraction will continue well into 2010.

And if global trade continues to contract at current rates, the numbers will get worse. Germany ran a current account surplus of 7.6% of gross domestic product in 2007. This means that a global trade slowdown will impact Germany disproportionately hard. Last week’s news about the 2.2% year-on-year fall in Chinese exports in November is an omen of deteriorating global trade volumes. To make matters even worse for Germany, the real exchange rate of the euro is going the wrong way.

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