German economy to contract as exports falter, says Merkel adviser Bofinger

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The German economy is likely to shrink in the fourth quarter of this year and into 2013 as demand for its exports from struggling eurozone countries drops, Peter Bofinger, economist and member of the German Council of Economic Exports, told RBS.

Bofinger said the eurozone, which fell in to recession again in the third quarter, was facing a prolonged period of economic contraction and this would spill over to Germany. The country has so far proved resilient to the region’s sovereign debt crisis.

"The hope some people had that Germany would act as a locomotive for the rest of Europe has been very much disappointed," Bofinger said at a meeting with RBS clients in Dusseldorf. "We still rely on foreign demand for our growth, so I would be astonished if we saw Q4 growth in Germany."

Exports contribute 52 per cent to German gross domestic product (GDP) and the country sells about 60 per cent of its goods and services to European Union countries, according to the World Bank. Bofinger cited "downward trends" in German industrial production and new orders as signs that the economy could not remain resilient to budget cuts in countries such as Spain and Italy, which are choking demand for German goods.

"Europe is the biggest threat to Germany in 2013 and in my view the situation will not get better, it will get worse," Bofinger said. "I don’t know if it will deteriorate with the same momentum as it did this year but there is the potential that that momentum will increase."

While German gross domestic product (GDP) climbed 0.2 percent in the third quarter from the previous three months, the eurozone area succumbed to recession for the second time in four years, contracting 0.1 per cent in the same period. Exports from Germany fell 1.5 per cent in September versus August, industrial production dropped 2.1 per cent and new orders declined 3.3 per cent, according to the European Union.

A drop in German investor confidence and companies cutting production are also ominous signals for the country’s economy, Bofinger said. The ZEW Center for European Economic Research said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, fell to minus 15.7 from minus 11.5 in October, the first drop since August.

"I don’t think we should expect Germany to remain an island of stability," Bofinger said. "You only have to read the newspapers to get a sense of things to come for German companies."

For example, German engineering company Siemens unveiled in November a EUR6 billion savings plan to restore profitability, while Hamburg-based Hafen & Logistik AG, the largest container handler at the city’s port, cut investment plans for this year when the slowdown caused third-quarter profit to fall 28 per cent.

"Do we see the light at the end of the tunnel? Is the worst over? I would say no," Bofinger said. 

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The statements and opinions expressed in this article are solely the views of Peter Bofinger speaking at an RBS Insight Event in Dusseldorf on November 13 2012 and do not necessarily represent the views of the Royal Bank of Scotland.

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