German economy, Europe’s last hope, begins to slump. Despite a drumbeat of optimistic forecasts from economists and upbeat statements from various European leaders, the actual news on the economy continues to be grim, with figures released Tuesday showing that Germany, the continent’s flagship economy, contracted by about 0.5% in the final months of last year.
Combined with a flurry of disappointing results in other major economies, the stumble raised questions about Europe’s ability to escape recession.
Portugal’s central bank cut its economic forecast for the year on Tuesday, saying its economy will contract more steeply than expected. France said it was likely to miss its target for narrowing the budget deficit, raising the prospects of deeper spending cuts and additional taxes. Last month, Britain said its austerity budgets would extend three extra years, to 2018, because of weaker than expected growth.
“This idea that Germany is a powerhouse dragging the rest of Europe along with it is a bit of a myth to be honest,” said Philip Whyte, a senior research fellow at the Centre for European Reform in London. “You have a very weak periphery and a core which is not as strong as everyone seems to believe.”
Throughout the debt crisis, Germany has managed to float above the bad news, enjoying record employment, rock-bottom borrowing costs and export-led growth that kept chugging, in spite of the cloud hanging over the euro zone. But its European partners are also among its biggest customers, leaving it vulnerable to the continent-wide slowdown exacerbated by the very austerity policies of Chancellor Angela Merkel.
“The longer the euro crisis lasts, the more difficult the situation becomes for Germany,” said Stefan Kooths, an economist at the Kiel Institute for the World Economy. “Germany is not a Teflon economy.”
The German government is scheduled to release its report on the economy on Wednesday, and it will forecast growth in 2013 of 0.5%, the newspaper Handelsblatt reported. In the euro zone as a whole, which is in recession with record unemployment, any growth is considered positive. But most forecasts are based on the assumption that financial markets will remain calm. If anything shakes investor confidence, like political turmoil in Italy or Greece, the weak growth rate means Germany would not have much cushion against recession.
France will probably miss its deficit reduction target for 2012, according to preliminary data released Tuesday by the French government. Officials in Paris aimed for a deficit of 4.5% of gross domestic product, but data for November suggests the shortfall will be 4.8%, ING Bank estimated.
That means President Francois Hollande would have to find an additional $6.65 billion in revenue to meet the 2013 budget target, and France could face another credit rating downgrade. The data also shows the challenge of keeping France’s overall debt level from rising above its current level of more than 90% of GDP.
By contrast, Germany’s public finances are robust. Federal, state and local governments recorded a surplus for the year equal to 0.1% of GDP, the first government surplus since 2007. That creates leeway for Merkel to stimulate the economy with public spending if the downturn is worse than expected.
Despite the contraction in the fourth quarter, a compilation of annual economic data by the statistical office showed that the German economy is in fundamentally good shape. Exports rose 4.1% during the year, and 41.6 million people were employed — a record high and the sixth annual increase in a row.
And Jorg Kramer, chief economist at Commerzbank in Frankfurt, said in a note to clients that he expected the German economy to expand again in the first half of the year.
Still, Whyte, of the Center for European Reform, said that while he was more optimistic than at this time last year, “we’re still not out of the woods.” NYT