Germany Could Lead a Recovery

Klaus Abberger

Klaus Abberger is the deputy department head of Business Cycle Analyses and Surveys at the Ifo Institute for Economic Research.

Updated April 23, 2012, 4:51 PM

Is the European economy heading for a recession? The answer is: yes and no. There is not one answer, because there are three distinct patterns emerging. First are the small countries that need to be rescued. Some of them are already in recession. Second, there are some larger countries that are showing sluggish-to-moderate growth. In this group are Italy and Britain, which is in a somewhat different situation because it is not a member of the euro zone. These countries need austerity measures, structural reforms or both — meaning that in the near future they will not be growth engines. The third category is countries recently enjoying a strong upswing. The biggest among them is Germany. France is currently somewhere between the second and the third group, but clearly tending more to the third one.

A recovery could take hold in Germany, but it is vulnerable to outside crises.

Whether Europe is heading toward a recession will be decided mainly by the third category of strong countries. Here Germany is a key player. Is Germany strong enough to prevent a recession? The domestic development is quite healthy at the moment. In contrast to many other countries — especially to the U.S. — unemployment is exceptionally low and fell again in September. Fixed capital investment is also strong.

However, business and consumer confidence indicators are signaling a pronounced cooling. The Ifo Business Climate index has fallen three months in a row. This is a clear indication that Germany is vulnerable to international conditions. In particular, companies’ export expectations have weakened. Does this signal a recession? I would say “no” at the moment. The firms’ orders are quite high, and inventories are not too high. Capacity utilization in manufacturing is clearly above its long-term average. So there is some buffer for the German economy.

Whether this buffer is large enough depends on the course of the euro crisis, and it depends on the U.S. labor market. A banking crisis or a recession in the U.S. would also throw strong European countries back into recession. Without these shocks, they may go into a downswing but not into a recession. Strong domestic demand and further strong demand from the emerging economies will protect them.

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Topics: Economy, Europe, Germany, Greece, World

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