Germany's confusing economic picture forces risky choices on the Chancellor.JOERG KOCH
The German economy has battled back from its worst post-war battering to lead Europe out of recession - yet the very measures used to fend off collapse may leave it more vulnerable to a renewed decline next year.
Although the Ifo institute's barometer showed business morale moving back towards its long-term average in November, and gross domestic product growth accelerated in the third quarter, wary consumers put the brakes on the expansion.
Government stimulus boosted private consumption temporarily, helping drag the economy out of recession in the second quarter. The measures have also kept a lid on unemployment thus far, and prevented the financial sector from going into meltdown.
However, last quarter's economic growth was propped by a build-up in firms' inventories, and private consumption shrank by nearly 1 per cent during the three-month period.
Peter Bofinger, a senior economic adviser to the government, says Germany could even slip back into recession towards the end of next year as extra public spending is withdrawn.
"In my view the problems will begin from the second half of 2010 because in this period governments will have to withdraw their fiscal stimulus," Mr. Bofinger said. "I see a risk of a double-dip by the end of 2010 or early 2011."
Households are reining in spending now that a car subsidy scheme has run out, and firms wrestling with weak demand cannot hold onto unproductive workers indefinitely. They also face a shortage of credit which threatens to worsen in 2010.
A last-minute search for funds at lender WestLB has heightened worries that tight credit will hamper German firms seeking to capitalise on a rebound in global demand.
The stimulus impact is already fading and the finance ministry expects growth to slow in the fourth quarter.
The car subsidy plan, part of measures the government said were worth some €81-billion ($120-billion U.S.) over two years, proved popular and lifted consumer spending in the second quarter. But the boost proved short-lived.
"We'll see the same pattern over the coming quarters: private consumption will weaken because of rising unemployment," said Commerzbank economist Ralph Solveen.
The government's use of a shorter-hours work plan has successfully held down unemployment. But many firms cannot afford to keep all their workers next year.
"Some measures definitely helped but the short-hours scheme and the car subsidy plan have not made the problems go away. They have partly just been put off," said Andreas Rees, an economist at UniCredit in Munich.
The OECD said in its latest report that the shortened hours facility had not been enough to keep costs in line with lower production levels and labour productivity had fallen.
"Over the coming quarters, firms are thus likely to lay off workers and unemployment is projected to increase fairly rapidly," the Paris-based think tank added.
The OECD forecast the German unemployment rate would increase to 9.2 per cent in 2010 from 7.6 per cent this year, and rise further to 9.7 per cent in 2011.
Stimulus will in due course give way to cuts: Chancellor Angela Merkel's new government plans a push from 2011 to get the public deficit under the European Union limit in 2013.
Mr. Bofinger said he expected German household spending to still be fragile when governments exit their stimulus plans - begging the question: In that case, what will be left? Exports.
Germany was the world's biggest exporter of goods in 2008 before the global economic downturn clobbered industry, and foreign trade again offers the best chance of growth.
The euro's strength poses an additional risk, although Ifo institute economist Klaus Abberger said Tuesday this was being more than offset by strong demand abroad. What policymakers are really fretting about is a potential credit crunch starving industry of funds to meet growing foreign demand for the capital goods Germans excel in producing.
"I see the danger of a widespread credit crunch for large swathes of the German economy," said the president of the German employers' association, Dieter Hundt. "The financing problems for many companies have dramatically worsened already."
Banks have been reluctant to tap government aid for fear of being stigmatised. The head of Germany's bank rescue fund, Soffin, said last month less than half of its nearly €500-billion pot had been used so far. Volker Treier, chief economist at the chamber of industry and commerce, said Germany's bank rescue had been successful only to the extent that it had stabilised the sector: it has not yet ensured a steady flow of credit to businesses.
"This problem has worsened," Mr. Treier said, noting surveys of over 20,000 businesses had shown a rise in the number of companies suffering a deterioration in credit conditions to 26 per cent now from 20 per cent at the start of the year.