in recession
economic situation report by Süddeutsche Zeitung
by Helmut Maier-Mannhart
In these times of increasing uncertainty one thing at least is turning out to be a fact: It is no more a question, whether Germany slips into a recession, it is now a question, how long will the recession last. If one wanted to use the Anglo-Saxon definition to be certain about it, one would have to be wait for the rate change in gross domestic product to carry minus signs two sequential quarters in a row. However this is not necessary; the individual building blocks of the economical total show already now that the swing-down has already turned into a recession, even if the chancellor does not want to see it this way.
xave.de
On the occasion of the public announcement of the autumn research institutes' report Gerhard Schroeder announced in his apodictic fashion: " There's no threat of recession, and we should also not talk ourselves into it. " It is clear that, were it so, he could reject the recommendations of the economy researchers, who would prefer to bring forward next level of the tax revision, which would already in the year 2002 bring the taxpayer a tax break of 13,5 billion DM. The chancellor acts freely after the slogan: If I ignore the smoke, then I don't need to lose any sleep over ways and means of putting out the fire.
A clear understanding of realities would be helpful in this situation. One then realizes for example that the economy in Germany is in a real shock condition. Nothing clarifies this better than the Ifo business climate index, which in September never fell that way since the oil price shock in the year 1973. In the west it fell 4,5 points to 85, to the lowest level since the end of the recession in the year 1993.Even more serious is the drop of around 5,3 points in the index, that measures the business expectations in the next months.
These devastating values are not just a psychological effect of 11 September, but have a real background: the incoming orders for September are down 7,4 per cent year to year. Those continuously weak order activity has already reached the production and thus the capacity utilization as well. From over 90 per cent at the beginning of this year it down to under 85 per cent towards. The corresponding development can be seen on the job market. Here the unemployment numbers reached 3.725 million in October, around 114-000 higher than in the same month of the previous year..
If at the end of this year, as forecast by the institutes, there's still a positive bottom line of 0.7 per cent growth, this does not speak by any means against the thesis that the recession is already there. This growth is fed exclusively by the still quite tidy start in the first quarter, when the gross domestic product still could grow by 1,6 per cent. Since that time however it went downhill. And according to prevailing opinion a trend reversal can not be expected before the second half of 2002, if the US economy has picked up by then and is sending positive impulses to Europe and especially to the export-oriented Germany.
Why however do all hopes concentrate on USA, who themselves are in a recessionary phase right now? Because they have pushed the lever the other way, both in the monetary and in the fiscal policy. After the latest interest drop by the Federal reserve short term cash does not cost more than two per cent and is thereby as cheap as it has not been for decades. Additionally the Bush administration is wrapping up an economic situation package in the order of magnitude of 150 billion dollars. Both taken together gives one hopes that the US economy is about to cross the valley relatively briskly and will already in the first Quarter 2002 start to show upward tendencies.
What is happening in Europe, stands out in sharp contrast. Here the European central bank left its course of small steps and lowered on Thursday the key interest rate by half a point to 3,25 per cent. Common opinion, however, is, that this is too late, because the monetary policy revives the national economies with a delay of approximately one year. Because the US federal reserve accepted the idea of rate reductions much earlier and in a much more energetic fashion, it can be assumed that it will succeed much earlier than in Europe, where unfounded fears of inflation and the forceful concentration of the EZB on having to prove its independence delayed the process.
Wrong prescriptions
And in the fiscal policy? Now, here the German government is going exactly the opposite way to the USA. While in America the taxes are being cut, Germany is increasing them.. Tobacco and insurance Taxes, ecology tax are all about to rise next year; taking cash out of citizens' pockets, thus weakening their purchasing power, instead of strengthening it, not by strongly rising wages, which settle down on the cost side of the businesses in a competition-restraining way, but by eliminating taxes or social security contributions. However, even the latter will continue to rise due to increases in the health insurance contributions. This is no concept to fight recession, it is more like an upswing prevention plan.
The pivotal point of the Federal Government fiscal policy so far was 1.5 per cent of net borrowing, which Hans Eichel wanted absolutely to hold to. Meanwhile it dawns also on the Minister of Finance that this is impossible to hold on to in times of sinking tax receipts and increasing unemployment costs. Why after all? To hold on at all costs to the consolidation course in a recession is as meaningful as to prescribe a slim-down cure for a bulimic person. When, if not in a recession, fulfills the state the conditions allowing up to three per cent of net new deficit, as granted by the Maastricht contract? Such a one-year outlier would mean not a break away from the needed budget consolidation policies, but only a brief interruption.
This is also the creative policy form, the president of the Ifo institute, Hans Werner Sinn, has in mind, when he asks the government with harsh words to give up finally its abstaining attitude and get active. Sinn, who definitely is no born interventionist, suggests to reactivate the old and venerable stability and growth law and grant Germany a time-limited income tax break of around ten per cent as well as time-limited investment premium of 7.5 per cent. Like Sinn many people wish the chancellor's calm hand finally gets a grip on the problem.
unsolicited and unauthorized translation by DJ
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