Country Report Germany January 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 2.6% of GDP in 2009 and 2.9% in 2010.
• Following large cuts in interest rates in October, November and December, 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 1.8%. A deepening of the international financial crisis would result in downward revisions.

Monthly review

• Although the outlook for the economy is worsening, political support for the country's major parties remains stable. The senior coalition partner, the CDU, retains its wide lead in ratings.
• Jockeying for position between the two coalition partners is intensifying and has contributed to slowing the government's policy response to the economic crisis.
• SoFFin, the entity entrusted with the management of Germany's bank rescue package, is currently negotiating with 15 financial institutions on the terms that it will offer them for equity support and loan guarantees.
• On January 8th SoFFin infused 10bn into Commerzbank, in addition to an earlier 8.2bn injection.
• SoFFin expects to increase loan guarantees to 220bn by the end of January, from 90bn currently.
• The incipient global recession is increasingly reflected in weakening export demand. In volume terms, year-on-year export growth went from 6.4% in the second quarter to a contraction of 10.6% November
• Manufacturing orders, which contracted by 22.7% in October, suggest that export demand will remain extremely weak.

Source: Country Report