Country Report Germany February 2009

Outlook for 2009-10

• The global financial crisis and its effects increase the risks attached to the Economist Intelligence Unit's political, policy and economic forecasts. Severe recession, more radical policy changes and less political stability are possible.
• We maintain our view that the Christian Democratic Union (CDU) will emerge as the strongest party at the next election (scheduled for September 2009) and that the chancellor, Angela Merkel, will win a second term.
• Foreign matters are likely to remain high on the political agenda during the outlook period, with reform of the global financial system and relations with Russia among the most difficult issues for Germany to manage.
• The general government balance is forecast to move from balance in 2008 to a deficit of 3.7% of GDP in 2009 and 4.3% of GDP in 2010.
• After large cuts in interest rates in October, November and December 2008, further cuts are expected as inflation subsides and economic growth weakens.
• In 2009 we expect the first full-year contraction of the economy since 2002, with GDP falling by 2.4%. A deepening of the international financial crisis would result in downward revisions.

Monthly review

• In mid-January 2009 the government unveiled a large spending package aimed at halting the rapid descent into recession. The coalition parties overcame their budgetary concerns and political differences to reach a deal.
• The package was similar in size to those of other large European countries, and when earlier measures are included, it amounts to €38bn (1.5% of GDP) in 2009 and €44bn (1.8% of GDP) in 2010.
• Commerzbank, the second-largest German bank, received another €10bn in equity support in mid-January 2009, in addition to the €8.2bn that it was granted in November 2008.
• As German banks continue to face large write-offs, which reduce their equity, calls for a "bad bank" to be set up have intensified, as they have in many countries enduring the financial crisis.
• In November industrial orders fell by 24% year on year, an even more precipitous collapse than in October. The fall in November was the sharpest decline since the series was started in 1953.
• More positively, and contrary to expectations, German business confidence improved slightly in January 2009, remaining close to the reading for December 2008, according to the Ifo Institute's index of business sentiment.

Source: Country Report

This report covers the following industry codes:
SIC Code: 49;60
NAICS Code: 22;52