FRANKFURT (AFX) - German second quarter GDP is expected to be have declined by up to 0.5 pct from the first quarter, with the most optimistic forecasts predicting only a stagnation, according to economists polled by AFX News.
Official statistics for second quarter growth will be issued next week, but the Bundesbank is expected to give a preliminary indication in its August report today.
Full year GDP is expected to grow by between 0.7 pct and 1.5 pct year-on-year -- well below the government's target of about 2 pct -- as the euro zone's largest economy battles with falling domestic and foreign demand, a manufacturing sector in recession, rising unemployment and the burden of propping up a sluggish former GDR. German chancellor Gerhard Schroeder publicly admitted for the first time last week that growth may only be 1.5 pct this year and that unemployment is not falling in the way the government expected. Economists said that such comments are long overdue. Germany has a high dependence on the export of capital goods to non-euro zone countries than other euro zone members, and for this reason is more susceptible to the US and world slowdown, Deutsche Bank economist Ulrich Beckmann said.
Deutsche Bank expects second quarter growth to be nil, while full year growth is expected to be 1.5 pct.
Also, the German manufacturing industry is much more cyclical than that of its fellow euro zone members, in the sense that investment goods play a more important role, BHF Bank economist Stephan Rieke said. Rieke expects a Q2 GDP decline of 0.1 pct, and positive 1.0 pct in the full year.
"The German economy reacts much more to cyclical swings outside (the euro zone)," he said.
However, many of the problems with the German economy cannot be put down simply to its exposure to depressed world markets. Many of them are Germany-specific, economists said. This is evident in the comparative strength of the French economy compared to that of Germany.
Since 1995 Germany annual growth has on average been around 1 pct lower than that of the euro zone's other 11 states put together. Hopes that the present government's tax reforms would bring Germany up to speed with some of its neighbours have largely been dashed, as have hopes for a programme of reforms to 'modernise' the German economy, particularly through labour market deregulation, economists said.
Tax reforms have failed to have a significant effect on private consumption since they have been offset by high energy prices, food prices and exchange rate effects.
Even now that energy prices have started to come down, the reforms are having little effect, since prices of other consumer goods remain high, Nomura economist Adolf Rosenstock said. Rosenstock predicts a Q2 GDP decline of 0.2 pct, and growth of 1.2 pct in the full year -- although the full year forecast is under review, and may be cut to around 0.8-0.9 pct, he said.
Labour market reforms are not expected ahead of elections in the autumn of 2002. The reforms being called for would be highly unpopular with powerful factions within Schroeder's own Social Democratic Party, with his Green Party coalition partners, as well as large parts of the electorate, economists said.
"The political probability of such a reform is very low at the moment," BHF Bank economist Stephan Rieke said. Nor are economists holding their breath for labour market reforms even after the election, which Schroeder is widely expected to win. "I wouldn't expect deeper reforms after the elections either. There will be some adjustments in the labour market but no structural reform," Rieke said.
Germany's membership of the euro zone is seen as being a mixed blessing, economists said. While the weak euro has helped German exports not to go into an even more pronounced decline, euro zone interest rate levels have been far from beneficial, economists said. Even with most economists predicting a rate cut before the end of September, this is widely seen as being 'too little, too late' for the German economy.
"(A rate cut) might ease the pain here and there, but it is will be too late for this slowdown," Nomura economist Adolf Rosenstock said. Last year's rate hikes "have hit the economy at a most unwelcome moment," he said.
UBS Warburg expects a Q2 GDP decline of 0.5 pct, and full year growth of 0.7 pct. Morgan Stanley expects a Q2 decline of 0.2 pct and full year growth of 1.0 pct, while Commerzbank expects negative 0.25 pct in Q2 and full year growth of no more than 1.0 pct, it said last week.