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Germany declares official recession
Germany has become the first of the G7 powers to declare an official recession. It will almost certainly be followed by France and Italy as growth collapses across the eurozone.
The OECD club of rich states issued its own gloomy forecasts yesterday, warning that Euroland, the US and Japan, will all shrink next year – the first synchronized slump in the three areas since the first oil crisis of the mid-1970s. "This is certainly not a V-shaped recession," said Jorgen Elmeskov, the group's chief economist.
"In normal circumstances we'd say monetary policy is the instrument of choice, but these aren't normal times. The transmission of monetary policy may not work due to the credit crunch," he said.
Germany's statistics office said output had fallen by 0.5pc in the third quarter, far worse than expected. It is the second quarter in a row of declining output.
Bert Rurup, head of Germany's council of "Wisemen", said the crisis has turned vicious over the late summer. "The collapse of Lehman Brothers, which should absolutely have been prevented, brought the global financial system to the brink of collapse. Governments have averted catastrophe by taking action, which should limit the sort of damage to the real economy that occurred in the Great Depression. But I can't exclude horror scenarios, however unlikely."
Jacques Cailloux, Europe economist at RBS, said Germany is sliding into the deepest slump in half a century. "We expect the economy to contract by 1.2pc next year, the worst in the euro area," he said.
Both RBS and Citigroup say the European Central Bank will have to follow the Bank of England with drastic rate cuts next month, perhaps with a three-quarter point rate reduction to 2.5pc.
Germany has been hit first – and hardest – because of its reliance on industrial exports. This is the flip-side of its achievement in becoming become the world's biggest exporter, with a current account surplus of 7pc of GDP. It is now "leveraged" to the downturn in China, the Gulf and Eastern Europe – the new locus of the financial crisis. Hungary, Ukraine, Serbia and Belarus are in the arms of the IMF. Russia is in chaos as oil prices crash.
"Foreign orders have fallen by 18pc since November," said Mr Cailloux. "This is very bad for German manufacturing and we are afraid there is going to be a labour shock as they start to lay off people."
The engineering group Siemens is cutting 17,000 jobs. The German car industry – which accounts for 20pc of the nation's workforce – is going through an ordeal by fire. BMW has halted production at three plants, telling workers to stay home. The auto parts-maker Continental said it is laying off 5,000 contractors.
The government has waived a new car tax for a year after new car sales fell by 8pc in October – they fell by 16pc across Europe over the same period – but the move is viewed as too little, too late.
While China is launching at $586bn (£396bn) fiscal blitz, and Japan is spending $275bn, Germany has so far stuck to its orthodox script – though it has a balanced budget, and ample scope for stimulus. Its pop-gun package of €12bn (£10bn) over two years is pocket change for Europe's biggest economy.
"Germany is at a tipping point," said Giles Moec, from Bank of America. " It needs a fiscal plan of about 1pc of GDP right now, and this must be implemented immediately. But culturally Germans don't like big fiscal boosts."
The Left-Right coalition of Chancellor Angela Merkel – now looking very fractured – has been criticised for sleep-walking into this crisis. It dismissed warnings of recession as "preposterous" and denied that Germany was facing a credit crunch until the collapse of the mortgage lender Hypo Real in September, the trigger that forced Berlinto step in with a €500bn guarantee for deposits. Twelve banks and insurers have tapped the state rescue so far, including Commerzbank .
German confidence in the financial system has since suffered a severe blow. A quarter of the country's property funds have had to freeze withdrawals, including those run by Morgan Stanley, Credit Suisse, AXA and Sweden's SEB, amounting to a total of €34bn.
These funds have been a conduit for investing Germany's abundant savings all over Europe and beyond. The crisis in the sector knocks away another prop for property prices in Britain, Spain, Ireland and Denmark. This has already hit the City of London, where Signa Deutschland has had to pull out of its £150m purchase of Milton Gate from UBS.
Thomas Fricke, chief economic columnist at the FT Deutschland, said that ultimately it is the ECB that bears the most responsibility for this recession. "The bank's failure to cut rates after the summer of 2007 and the grotesque way it raised rates in July may prove to be one of the greatest monetary policy errors in history," he said.
