Business Outlook: Europe
PRESSURE ON THE BUNDESBANK IS RISING
Germany's industrial sector ended 1994 with an unexpected head of steam. That brightens the economy's prospects in 1995 but raises the chances that a hike in interest rates by the Bundesbank will come sooner rather than later.
New orders taken by west German manufacturers increased a surprisingly large 2.7% in December. For the year, new orders grew 10.8%. Demand continues to rise from both international and domestic markets (chart). Foreign orders were up 2.9% in the month, while domestic bookings advanced 2.6%.
Among domestic orders, the biggest gain came from capital goods, reflecting the drive to lift productivity, while consumer-goods orders fell. Households spent strongly in the third quarter, but now they are feeling the pinch from a January income-tax surcharge and high unemployment. Meanwhile, the January jobless rate rose to a surprisingly high 8.9%, from 8.5% in December.
German manufacturers need demand at home to keep rising because export growth may soften over the course of 1995. The drag will come mainly from the slower growth in the U.S. and Britain, which together buy 15% of Germany's exports, according to data from the International Monetary Fund. Luckily for Germany, its exports shouldn't be hurt by the spillover of the Mexican crisis. Only about 3% of its shipments go to Latin America. Helping to lift exports will be the growing economies in Europe and Asia.
For now, monetary policy remains on hold. At its Council meeting on Feb. 2, the Bundesbank kept interest rates steady, even though the U.S. Federal Reserve and the Bank of England had hiked rates that week. High joblessness and the resultant downward pressure on wage demands, combined with the slowdown in the M3 money supply to 5.7%, putting M3 within the Bundesbank's target, argue for a "steady hand" policy. But the strength in Germany's industrial sector raises the pressure on the Buba to move rates up.BY JAMES C. COOPER & KATHLEEN MADIGAN