Country Report Germany May 2009

Summary

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 4.4% of GDP in 2009 and 5.7% of GDP in 2010.
After large cuts in interest rates in each month from October 2008 to January 2009, further cuts are expected as inflation eases and GDP falls.
In 2009 we expect the first full-year contraction of the economy since 2002, with GDP falling by 5.3% this year and by a further 0.8% in 2010.

On April 19th the junior coalition partner, the Social Democratic Party (SPD), published its draft manifesto. This has a clear focus on wealth redistribution, social justice and increased government intervention.
The CDU is still drafting its manifesto. Leading figures differ on fiscal policy, with some seeking to offer voters tax cuts, while fiscal hawks argue that there is no room for an easing of the tax burden.
On April 17th the Special Fund for Financial Market Stabilisation (SoFFin) moved to nationalise the ailing bank Hypo Real Estate. It offered shareholders 1.39 per share, 10% above the minimum price it is obliged to pay.
On April 21st the coalition partners, with SoFFin and the central bank, agreed a plan that would remove "toxic" assets from banks' balance sheets. The plan is expected to be published as a bill in early May.
Capacity utilisation in the first quarter of 2009 fell to 76.2%, the lowest level since the series began in 1985. And with manufacturing orders falling by 36.3% in February, the gap looks set to widen.
Car scrapping incentives have provided a massive stimulus to automotive demand. New-car registrations in February 2009 reached an all-time high of 345,000a 44% increase on January and a 22% increase on February 2008.
The volume of retail sales (excluding cars) contracted by 2% year on year in January 2009 and by 2.1% in February.

Source: Country Report

This report covers the following industry codes:
SIC Code: 48
NAICS Code: 517