Bloomberg News

German Growth May Grind to Halt as Crisis Saps Exports: Economy

November 21, 2011

Nov. 21 (Bloomberg) -- Growth in Germany, Europe’s largest economy, may slow to a near standstill next year as the region’s debt crisis saps demand for exports, the Bundesbank said.

The Frankfurt-based central bank cut its 2012 growth forecast to between 0.5 percent and 1 percent from a June prediction of 1.8 percent, and said a “pronounced” period of economic weakness can’t be ruled out if the crisis worsens.

“The significant weakening in foreign demand coupled with financial market nervousness” means “the German economy faces more difficult terrain in the months ahead,” the Bundesbank said in its monthly bulletin published today. There are “weighty” risks to the outlook, it said.

The two-year-old debt crisis is forcing governments to implement tougher austerity measures across the 17-nation euro area, Germany’s biggest export market. The European Central Bank says the region may slip back into recession as leaders struggle to find a way to contain the turmoil, which is now threatening to engulf Italy. Bundesbank President Jens Weidmann said on Nov. 18 the crisis now poses a downside risk for the global economy.

Reports earlier today suggested growth may slow in Asia, a market German companies have turned to as European sales wane.

Japanese exports dropped 3.7 percent in October from a year earlier, Singapore said its growth may slow to as little as 1 percent in 2012 from 5 percent this year, and China signaled the global economy faces an extended slide.

‘Extremely Severe’

The world economic situation is “extremely severe,” Chinese Vice Premier Wang Qishan said, according to state news agency Xinhua. “The global economic recession triggered by the international financial crisis will be long-term,” he said.

Later today, the Federal Reserve Bank of Chicago is scheduled to release a gauge of U.S. economic activity in October. The Chicago Fed national index, which draws on 85 economic indicators, was below zero in August and September, signaling below-trend growth.

European stocks fell, with the benchmark Stoxx Europe 600 Index down 2.3 percent at 12:31 p.m. in London. Futures on the Standard & Poor’s 500 Index expiring in December declined 1.6 percent and the MSCI Asia Pacific Index retreated 1.5 percent.

The euro declined 0.5 percent to $1.3452. It has dropped more than 7 percent against the dollar since Aug. 29. Investors are losing faith in Europe’s ability to conquer the crisis, dumping the bonds of highly-indebted nations like Italy and driving up borrowing costs.

French AAA Rating

Moody’s Investors Service today declined to make an immediate comment on a report in Le Figaro newspaper that France’s AAA credit rating is at risk. French 10-year bond yields rose eight basis points to 3.53 percent.

While German bonds are benefiting from the debt crisis as investors flock to haven assets, growth in Europe’s economic powerhouse is slowing. German factory orders and industrial production slumped in September and investor confidence declined to a three-year low this month.

Beiersdorf AG, the maker of Nivea skin creams, said Nov. 3 that third-quarter profit fell 25 percent as costs rose and Europeans bought fewer personal-care products. Revenue in Europe, the company’s biggest market, declined 3 percent during the quarter, the Hamburg-based company said.

Labor Market

The German economy grew 0.5 percent in the third quarter after expanding 0.3 percent in the previous three months. The Bundesbank didn’t comment on its June forecast for 3.1 percent growth in 2011.

Some of the falloff in exports may be offset by stronger domestic demand as households expect an increase in income prompted by “the currently very favorable employment environment,” the Bundesbank said.

While unemployment rose for the first time in two years in October, the jobless rate remains near a two-decade low.

Still, it’s of “crucial importance” that debt-strapped euro-area governments fix their public finances and restore lost competitiveness, the Bundesbank said.

ECB council member Ewald Nowotny said in Vienna today that euro-area governments can’t rely on the central bank to solve the debt crisis by printing money.

--Editors: Simone Meier, Fergal O’Brien

To contact the reporters on this story: Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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