Merkel Faces Economic ‘Mess’ as Stimulus Spending Runs Out
Germany’s recovery from recession came in time to give a boost to Chancellor Angela Merkel’s re- election yesterday. It may not last much longer.
Unemployment is set to jump and consumer spending to fall in 2010 as government stimulus runs out, according to the Halle- based IWH institute, an adviser to the government. Companies are warning of a credit crunch, and debt at a post-World War II high leaves policy makers with few options to counter a double dip.
“The chancellor is not to be envied,” Ulrich Kater, chief economist at Dekabank in Frankfurt, said in an interview. “Having rescued the economy through large government aid programs will soon be forgotten and what’s left is cleaning up the mess.”
Exceptional measures of 85 billion euros ($124 billion) lifted spending and subsidized jobs, helping keep unemployment below levels in the U.S. and France, even as the economy suffered its worst post-World War II recession.
“We’re through the worst,” Laurenz Meyer, economic spokesman in parliament for the CDU, said in an interview. “But the second wave of this crisis has yet to hit us.”
Spurred by extra spending equal to 1.6 percent of gross domestic product in 2009, the economy grew 0.3 percent in the second quarter, confounding economists’ forecasts. It may expand another 0.8 percent in this quarter. Growth may reach 0.9 percent in 2010, the IWH institute says.
Germany, the world’s biggest exporter, was hammered by the global contraction as sales of Wolfsburg-based Volkswagen AG cars and Munich-based Siemens AG equipment slumped. The government has forecast a 2009 contraction of 6 percent.
Tax Cuts
Merkel’s Christian Democrats pledged across-the-board tax cuts worth about 15 billion euros and looser labor-market rules making it easier to fire employees. The Free Democrats, her likely coalition partners, want to go even further, creating just three tax brackets with the highest rate at 35 percent, down from the current ceiling of 45 percent.
Even with the 5 billion-euro “cash-for-clunkers” program, the world’s largest, which ended this month, there are no signs consumer spending overall has stabilized, the Kiel-based IfW economic institute said in a Sept. 9 report.
The unemployment rate will jump to 10.3 percent in 2010 from 8.1 percent this year, the IWH institute forecast on Sept. 15. Consumer spending will drop 0.7 percent in 2010 after growing 0.5 percent this year, it said.
Tighter Credit
Adding to the burden, the BGA association of wholesalers and exporters said Sept. 15 that 42 percent of its members expect credit to tighten. Small and mid-sized companies, which provide 70 percent of jobs, will face tougher loan conditions in the first half of 2010, Deputy Economy Minister Hartmut Schauerte said last month.
Faced with such gloom, Merkel will have few tools to deploy. Net new borrowing will almost double next year to 86.1 billion euros, according to the government budget.
“There’s quite a bit of bad news left to digest,” Elga Bartsch, chief European economist at Morgan Stanley in London, said in an interview. “The challenge for the next government is that its fortunes hinge on economic indicators that trail the business cycle.”