Country Report Germany July 2009

Outlook for 2009-10

• The global financial crisis and its effects increase the risks attached to the Economist Intelligence Unit's forecasts. A prolonged, severe recession would, as elsewhere, imply some political risk.
• 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 the stability of peripheral EU economies in question. Germany will push for radical reform of the global financial system.
• The general government budget is forecast to move from balance in 2008 to a deficit of 4.7% of GDP in 2009 and 6% of GDP in 2010.
• With interest rates in the euro area at 1%, we do not foresee further reductions in rates. The monetary authorities may intensify their unorthodox policy measures if conditions do not improve.
• In 2009 we expect the largest contraction of the economy since records have been kept, with GDP falling by 5.3% this year, and by a further 0.9% in 2010.

Monthly review

• Elections to the European Parliament were held in June. The pecking order of the parties' support was in line with expectations, with the CDU, the senior partner in the governing "grand" coalition, emerging victorious.
• The junior coalition partner, the Social Democratic Party (SDP), won just 20.8% of the vote, its worst result in the post-second world war era.
• The government is moving to restructure the state-owned banking sector. The measures, agreed by the cabinet on June 10th, foresee the banks being split into two entities, a good bank and a bad bank.
• On May 30th the German government put up loan guarantees of ???4.5bn to save the carmaker Opel, a European subsidiary of the bankrupt US company, General Motors (GM). A large retailer, Arcandor, was not bailed out.
• The unprecedented downturn in industrial orders from October 2008 to February 2009 has appeared to bottom out since then. In March orders grew by 3.7% month on month. In April they were unchanged on March.
• Year-on-year contractions in employment in March and April, of 0.1% and 0.4% respectively, were recorded. Despite this, the unemployment rate fell to 8.2% in May, from 8.3% in April.
• Inflation reached zero in May 2009, the first time prices have not risen over a 12-month period since May 1987.

This report covers the following industry codes:
SIC Code: 60;37;53;49;80;48;70
NAICS Code: 52;336;44;22;62;517;72