Country Report Germany June 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 4.6% 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. In May 2009 the monetary authorities moved cautiously to introduce "quantitative easing" and they may go further 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

• In the election campaign, tax policy is emerging as one of the most hotly debated issues, with some political forces maintaining earlier pledges to cut taxes, despite large deficits in the public finances.
• A proposed "bad bank" scheme was outlined in mid-May. A bolder plan was eschewed, in part owing to the extent of the perceived political costs of admitting to voters the size of the potential losses that they may have to bear.
• The scheme foresees the creation of several, institute-specific "bad banks", where commercial banks can park their least-liquid assets for up to 20 years.
• The nationalisation of the DAX-listed bank Hypo Real Estate (HRE) is close to completion.
• In the first quarter of 2009 GDP contracted by 3.8% quarter on quarter, the steepest fall since official quarterly results were first published in 1970. Year on year, GDP contracted by 6.9% in calendar-adjusted terms.
• This was not only the fourth consecutive quarter-on-quarter decline, but the pace of decline has deepenedGDP contracted by 0.5% in the second and third quarters of 2008 and by 2.2% in the fourth quarter.
• Recent forward-looking indicators raise hopes that the economic contraction has bottomed out. The Ifo index rose from 82.2 points in March 2009 (the lowest value since the start of the series in 1991) to 83.7 points in April.

Source: Country Report

This report covers the following industry codes:
SIC Code: 70;10;60;39
NAICS Code: 72;212;52;31