Germany sees upswing amid eurozone turmoil

AP News
Posted: Apr 20, 2012 10:08 AM
Germany sees upswing amid eurozone turmoil

A key index of business optimism on Friday reinforced what an increasing number of economists are saying: Germany is beginning to see an upswing _ even as the rest of the 17-country eurozone struggles with economic and financial turmoil over too much debt.

The Ifo institute survey of business executives published Friday edged up to 109.9 points from 109.8 the month before, beating market expectations of a slight decline. That follows an unexpected fifth straight monthly rise Wednesday in the ZEW index, which measures the outlook among investment professionals.

Both are leading indicators, suggesting where the economy might be headed in the next six months. Economists say these and other data mean Germany may now have avoided a recession and this year will easily outpacing the eurozone as a whole, which is expected to shrink 0.3 percent this year.

Leading economic institutes this week raised their forecast for 2012 to 0.9 percent from a 0.8 percent prediction last fall, and predicted 2 percent growth next year. Some economists now think the economy grew in the first quarter as well, avoiding a second straight quarter of contraction after a slight 0.2 dip in the fourth quarter of last year. Two quarters of falling output is a technical definition of recession.

Both parts of the Ifo index _ estimates of current conditions and expectations for the next six months _ were up. Sentiment rose among both industrial firms, which are often oriented toward exports in Germany, and retailers, which depend on domestic demand. Economists say Germany's low unemployment rate of 5.7 percent is giving workers the confidence they need to spend money in stores.

"The German economy is showing itself to be resilient," said Ifo institute head Hans-Werner Sinn.

Germany is motoring ahead even as fears worsen about the eurozone debt crisis. Spain and Italy are seeing higher costs to borrow money on bond markets and roll over their debt loads, while their economic growth is sagging. Their troubles _ which could mean big losses for shaky banks if governments can't pay _ hold out a threat to the European and global economies.

High borrowing costs and fears of default have already pushed Greece, Ireland and Portugal to seek bailout loans from other eurozone countries. Greece additionally had to ask creditors to write down (EURO)107 billion in debt that it could not pay.

Germany is reaping the benefits of efforts begun in the early 2000s to cut labor costs for businesses _ a reform effort that has now been taken up by Spain and Italy but which may need years to bring them higher growth. It is benefiting from its traditional strengths as an exporter of cars and machinery, and growth has been boosted by the recovery in the United States and strong growth in emerging markets such as China.

Ironically, in some ways the debt crisis has given Germany some help.

Because of the country's reputation for stability, investors are willing to buy its bonds as safe places to put their money. That means rock-bottom borrowing costs for the government, in contrast to the heavy risk premiums paid by Italy and Spain to borrow _ costs that threaten to undermine their budgets and create a self-fulfilling default spiral.

A two-year bond sold Wednesday cost the German treasury only 0.14 percent interest yield, and a 10-year bond issue from April 11 yielded only 1.77 percent. With inflation at 2.3 percent, Germany's creditors are accepting no return on their lending or even paying for the privilege of lending it money. Rates are also low because the European Central Bank has reduced its benchmark to a lowest-ever 1 percent.

German economists say those rock-bottom rates are helping lower borrowing costs for companies as well, spurring business investment that is helping fuel the recovery.

Additionally, the crisis has kept the euro's exchange rate weaker than it otherwise would be, boosting exports. The eight economic institutes who produce a twice-yearly forecast for the government says that means German goods are cheaper in foreign markets than they have been for 30 years.

The institutes warned however against complacency. They say their economy remains threatened by any wider disaster in the eurozone because 43 percent of its exports go to other eurozone countries _ and 20 percent to the five crisis-hit countries, Spain, Italy, Greece, Ireland and Portugal.

That means a substantial 12.3 percent of Germany's economy is based on trade with the eurozone _ suggesting that a financial disaster among neighbors could easily spoil Germany's improving mood.