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Cablegate: Germany Goes Into Recession, Small Stimulus On the Way

VZCZCXRO1159
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHRL #1538/01 3191224
ZNR UUUUU ZZH
P 141224Z NOV 08
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 2628
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNMEM/EU MEMBER STATES
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 02 BERLIN 001538

STATE FOR EEB(NELSON),EEB/OMA(SAKAUE, WHITTINGTON), DRL/ILCSR AND
EUR/AGS
LABOR FOR ILAB(BRUMFIELD)
TREASURY FOR ICN(KOHLER),IMB(MURDEN, MONROE, CARNES) AND OASIA

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON GM

SUBJECT: GERMANY GOES INTO RECESSION, SMALL STIMULUS ON THE WAY

REF: LEIPZIG 00019,BERLIN 1476

1. SUMMARY. Germany has slid into recession, and major indicators
point to a further deterioration. There are few signs of a
turnaround in 2009. As manufacturing orders dry up and industrial
output sputters, German companies are bracing for a rough ride.
Despite the negative trends, however, some German companies are
reporting increased earnings, and Germans are enjoying slightly
higher wages and lower inflation. The government's fiscal situation
is likewise improved over the past year. The cost of the banking
rescue plan and Chancellor Merkel's small stimulus proposal,
however, will impede the goal of balancing the federal budget by
2011, and there doubts the measures will have the desired
stimulatory effect. END SUMMARY.

GLOOMY ECONOMIC INDICATORS
--------------------------

2. The global financial crisis has spilled over into Germany's real
economy, as the country enters its worst recession since 1996.
Gross domestic product (GDP), which grew by 1.4 percent in the first
quarter and contracted by 0.4 percent in the second quarter, fell by
0.5 percent in the third quarter, according to the Federal
Statistics Office. The fourth quarter may see another contraction.
As for 2009, the government's Council of Economic Advisors recently
revised its growth forecast to zero. September manufacturing orders
fell by 8 percent, the steepest drop since reunification.
Industrial output fell by 3.6 percent in the same month. Business
confidence as measured by the IFO Business Climate Survey is at its
lowest level in five years. The Frankfurt DAX Index struck a
52-week low in October, when it closed at 4,014.60. It has bounced
back somewhat, but is off some 35 percent since January.

3. The procession of companies reporting troubles is getting
longer. Deutsche Post, the parent company of the DHL, predicts
pretax profits will fall 8 percent in the third quarter, and has cut
back its earnings forecasts for this year and next. It is
announcing a cost-cutting program that will result in thousands of
layoffs, 9500 of which will be at its subsidiary DHL in the United
States. (Note: 8000 job losses are expected at DHL's distribution
center in Wilmington, Ohio (REFTEL A).) Automaker BMW said its
third-quarter profits had dropped 63 percent as the global economic
turmoil made consumers more reluctant to buy its sports and luxury
cars. The company also said the financial crisis made it impossible
to provide a forecast for the rest of the year. Reinsurer Munich Re
reported a net profit of 7 million euros in the July-September
period, but this was only a tiny fraction of the 1.2 billion euros
it earned a year earlier. The Chief Financial Officer remarked that
a "reliable profit forecast" was not possible in light of ongoing
market volatility.

ALL DOOM AND GLOOM ?
--------------------

4. Some companies are still reporting increased earnings, however.
For example, Volkswagen's luxury brand, Audi AG, reported that sales
over the past ten months had risen by 3.3 percent, to 844,700
vehicles. The company was confident it would achieve its goal of
selling one million cars in 2008. (Volkswagen's CEO has, however,
predicted a tough year for the auto industry in 2009.)

5. A recent survey by the German research group GfK showed that
German consumer confidence, though low, had recently inched upwards,
perhaps due to wage increases negotiated earlier in the year and
lower energy costs. Another survey by Germany's ZEW economic
institute reported that investor sentiment remained depressed in
October, albeit up from a record low in July. Depressed demand and
lower energy costs have caused inflation to cool. It peaked at 3.3
percent in July, but came down to around 2.4 percent in October.
Employment remains robust so far, but may have reached the tipping
point. The number of jobless fell below the 3 million mark in
October to 7.2 percent (down from 7.4 percent in September), the
lowest since 1992. (The government predicts, however, the economy
will shed around 30,000 jobs in 2009 due to the economic slowdown.)


6. Lower unemployment and other factors have had a positive effect
on the national (state and federal) deficit, which in 2007 showed a
70 million euro surplus, the first in 20 years. Although still
slightly in deficit, the federal government expects to finish 2008
with an additional 400 million euros in tax revenue. The increase
is even more pronounced at the state and communal levels, where
authorities will end up with 7 billion euros more in their coffers,

BERLIN 00001538 002 OF 002


mostly as a result of higher business tax revenues. Current
estimates for 2009, however, are that federal tax revenues will
increase by 2.2 billion euros less than was forecast as recently as
May. Furthermore, potential liabilities associated with the 500
billion euro bank rescue plan, as well as the recently proposed
stimulus plan, will alter the government's fiscal outlook
significantly.

MERKEL RESPONDS WITH STIMULUS PLAN
----------------------------------

7. In response to the discouraging economic indicators, Chancellor
Angela Merkel's cabinet has approved a package of 15 relatively
minor measures spread over four years to stimulate the economy and
protect jobs (REFTEL B). The measures focus on capital investments,
and are meant to avoid what some German critics call the "flash in a
pan" approach taken by the United States earlier this year. The
most significant elements include: 15 billion euros of new loans by
the state-owned development bank Kreditanstalt fuer Wiederaufbau
(KfW); 3 billion euros for KfW's infrastructure program for needy
local governments; 3 billion euros for building renovations aimed at
reducing CO2 emissions; 2 billion euros for various transport
projects; 200 million euros to boost regional economies; tax cuts
for small- and medium-sized enterprises (SMEs); and a one-year
suspension of taxes on new cars (two years for low-emission models).
Parts of the package do not represent new money, but rather an
acceleration of previously planned initiatives; e.g., from 2010 to
2009. The package will cost 23 billion euros over four years, of
which only 10.9 billion euros will come out of the federal budget.
The government thinks the overall economic impact could amount to 50
billion euros, due to the multiplier effect.

8. The IMF and others agree that Germany could use a fiscal
stimulus. The Chancellor's plan, however, has its critics. The
German government's own Council of Economic Advisors recently
commented that the measures were inadequately focused. The Council
levied particular criticism at the vehicle tax exemption, which they
felt would not do much of anything to boost growth. Others have
criticized the plan's small overall size. There will certainly be
ample debate over the plan's provisions, as most require legislative
approval. Meanwhile, the government has given up hope of balancing
the budget by 2011. Finance Minister Peer Steinbrueck conceded this
goal will not be attainable before 2013.

9. Ultimately, global trends may determine Germany's economic
prospects, as exports account for more than a third of Germany's
$3.2 trillion economy. Many of Germany's renowned small- and
medium- sized enterprises (SMEs) are exporters in their own right,
but are also integral links in large exporting firms' supply chains.
So companies of all sizes will feel the squeeze as global demand
for their goods falls. As a result, Germans are paying close
attention to stimulus efforts in Europe, Asia and the United
States.

10. This cable was coordinated with Congens Frankfurt and Munich.

© Scoop Media

 
 
 
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