German Economy: Business Too Hopeful

Posted by: Jack Ewing on June 24

Germans are a notably pessimistic folk, so I was a little taken aback to receive a report from UBS economists fretting about an “expectations bubble” among German business. “Expectations may well become too optimistic too soon,” UBS economist Martin Lueck wrote in a note to investors June 22, in response to a better-than-expected rise in the closely watched ifo index of business sentiment.

Over-optimism is not a charge often leveled at the Germans. But UBS economists are not the only ones worried that German business people are underestimating the risks to an economic recovery. For example, New York University economist Nouriel Roubini’s RGE Monitor points out that unemployment in Germany could still rise sharply. Because of government incentives for companies to reduce worker hours rather than lay people off, the jobless rate has risen only modestly, to 8.2% in May 2009 from 7.8% a year earlier. Consumer sentiment has also held up remarkably well.

German workers may have a false sense of security. As benefits for short-time work begin to expire in coming months, unemployment could rise to 11% by 2011, RGE Monitor estimates. “The consequences for consumption and government spending could be substantial.” And not just in Germany. The nation is the largest economy in Europe and sets the tone for the whole continent.

An expectations bubble has precedent. After the downturn in 2001 and 2002, business sentiment rose too fast, and there was a correction before the German economy really got going again. It does seem that the economy in Germany and much of Europe has stabilized. But for once a little more old-fashioned German pessimism seems to be in order.