Country Report Germany November 2008

Summary

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 to take place in September 2009) and 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 a surplus of 0.6% of GDP in 2008 to a deficit of 0.5% in 2009. In 2010 a deficit of 0.3% of GDP is expected if the economy returns to growth.
Following two 50-basis-point cuts in interest rates in October and November, further cuts are expected in the coming months and into 2009 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 0.2%. A deepening of the international financial crisis would result in downward revisions.

Since late September the government has launched a series of measures to shore up confidence in the financial sector and bolster the economy, but has generally reacted more slowly to the crisis than other G8 countries.
In mid-October the government announced a massive financial market stabilisation package in an effort to halt panic. The rescue package received broad political and public support.
The total amount of support is nearly 500bn. This includes loan guarantees for up to 400bn to increase liquidity and 80bn to acquire equity and high-risk assets in German banks.
On November 5th the government announced a package of measures aimed at supporting growth by incentivising investment and consumption, with most additional spending focused on the former rather than the latter.
The financial market crisis and the global economic downturn have accelerated markedly the slowdown in the German economy according to a series of leading indicators.

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