Global Economics

Germany Takes Out Its Wallet


There are some obvious economic perks to having the World Cup soccer championship in Germany this month. Just ask Franz Julen, the chief executive officer of Intersport International, Europe's largest sporting goods retailer. The Zurich-based company, which does the bulk of its European business in Germany, sold more than $600 million in soccer-related products last year worldwide. "This year, we expect an increase of 30% because of the World Cup," Julen says. "Our goal is to generate more than $880 million in sales."

Call it the feel-good factor—and it's not just thanks to the World Cup. After a slow economic recovery led by booming export sales, a long-awaited upturn in German consumer spending appears finally to be kicking in. From the newly-reopened Kaufhof department store on Berlin's Alexanderplatz to the boutiques of Frankfurt's Goethe Strasse, shoppers are out in force.

"Private consumption is picking up," says Eckhard Wurzel, economist with the Organization for Economic Cooperation & Development. According to the Federal Statistics Office's latest report on the economy, it rose a solid 2.9% in the first quarter of 2006 compared to the same period a year ago. That's a key reason the OECD forecasts Germany's economy as a whole will grow 1.8% this year, vs. just 1.1% last year.

LIVING IT UP. No doubt the World Cup helps. Silvia Pepino, senior European economist at JP Morgan in London, predicts the month-long championship could add half a percentage point to the German gross domestic product this year, based on the experience of France, which hosted the Cup in 1998 (see BusinessWeek.com, 3/22/06, "For Germany, a Cup of Plenty?").

But consumers are spreading their money around on other things, as well. Germany's second largest tourism group, Thomas Cook, which is a joint venture of airline Deutsche Lufthansa and retailer KarstadtQuelle, says summer advance bookings in Germany are up 9.8% year-on-year. Retail sales jumped 3.1% in April vs. the previous month. And new car registrations, already up 3% year to date, surged 9% in May, says Deutsche Bank.

Behind the consumer resurgence is a solid corporate revival that is prompting executives, at last, to expand their businesses and start adding jobs. In its semi-annual survey of more than 21,000 German companies, the German Chambers of Industry and Commerce, or DIHT, concluded that German business confidence is at its highest since 1992, and that for the first time since 2001 companies are hiring again.

CLOSING THE GAP. Consider auto parts and electronics giant Robert Bosch. It announced this week that it will invest $700 million in a new plant to build chips for airbags, electronic transmissions, emissions control, and other functions. The plant will create some 800 jobs and be online in 2009, producing one million chips a day.

All told, the Federal Statistics Office says corporate investment in plant and machinery rose 5.6% during the first quarter. "Companies are starting to invest and are hiring, and that has brought an end to the multiyear stagnation in private consumption," says Matthias Klein, economist at Credit Suisse in London. "German growth is finally closing the gap to the euro zone."

The trade engine also continues to roar. Exports surged ahead at 15.7% in the first quarter, though an increase in imports of 20.8% offset their impact on growth. Still, the economy overall grew 3.2% compared to the same period a year earlier. "The German recovery is stable enough that it will continue this year and through 2007," says the OECD's Wurzel.

HERE COME TAXES. There are still risks to the growth scenario, though. Oil prices remain high. Rising interest rates have sent jitters through stock markets in recent weeks. And the German government is planning to raise taxes to plug deficits in social security programs and reduce the federal deficit to get back in line with the Maastricht treaty requirements.

Starting in January, the government will increase value-added tax and the tax on insurance by three percentage points each. The well-heeled also will get hit with a new 3% wealth tax. Economists warn that the new taxes could put a damper on consumer spending next year, weakening the economy. The OECD currently forecasts 2007 growth at 1.6%.

Indeed, the prospect of new taxes combined with tighter monetary policy is starting to worry some experts. The ZEW index, a measure of confidence among economic analysts, dipped in June—a sign that their optimism could be waning.

SUMMER SMILES. But even raising taxes could be positive in the end if the government uses the funds to lower its budget deficit, says OECD's Wurzel. Germany would have to use the breathing room it gains to go further with its economic reforms, he says, reducing the bureaucracy that piles unnecessary costs on small companies. It would have to liberalize energy markets to achieve lower prices, and deregulate labor markets to make it easier for companies to hire new staff.

That's the long-term plan. Now, as summer breaks out and daily soccer matches keep locals and tourists buzzing with beer, bratwurst, and boosterism, Germany can take comfort in the fact that for the first time in years, its economy is finally firing on all cylinders.


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