Identifier
Created
Classification
Origin
05FRANKFURT549
2005-01-21 09:36:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Frankfurt
Cable title:  

Germany's Economy Grows in 2004: Break Out the

Tags:  ECON EFIN EUN 
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UNCLAS SECTION 01 OF 03 FRANKFURT 000549 

SIPDIS

SENSITIVE

STATE FOR EUR PDAS, EB, EUR/AGS, AND EUR/ERA
STATE PASS FEDERAL RESERVE BOARD
STATE PASS NSC
TREASURY ALSO FOR ICN COX, HULL

E.O. 12958: N/A
TAGS: ECON EFIN EUN
SUBJECT: Germany's Economy Grows in 2004: Break Out the
Beer, not the Champagne


This cable is sensitive but unclassified. Not/not for
Internet distribution.

UNCLAS SECTION 01 OF 03 FRANKFURT 000549

SIPDIS

SENSITIVE

STATE FOR EUR PDAS, EB, EUR/AGS, AND EUR/ERA
STATE PASS FEDERAL RESERVE BOARD
STATE PASS NSC
TREASURY ALSO FOR ICN COX, HULL

E.O. 12958: N/A
TAGS: ECON EFIN EUN
SUBJECT: Germany's Economy Grows in 2004: Break Out the
Beer, not the Champagne


This cable is sensitive but unclassified. Not/not for
Internet distribution.


1. (SBU) Summary: Germany's Federal Statistical Office
reported that Germany's economy grew 1.7% in real terms last
year. Even taking into account that 0.6 percentage points
of that growth came from extra working days, the growth was
higher than any experienced since 2000. The cause for
celebration is muted, however, as prospects for 2005 are
uncertain. The consensus forecast sees real growth of
around 1.3 percent.


2. (SBU) Growth in 2004 was driven by a positive trade
balance. The consensus assumption for 2005 is that lower
positive net trade will not be compensated by a stronger
pickup in domestic demand. Previous forecasts have given
weight to uncertainties in economic outlook and policy
suppressing investment and private consumption. Smooth
implementation of recent reforms and plans for no major new
initiatives in the coming year could remove some
uncertainties and, together with growing industrial
confidence, provide a surprise on the upside with higher
growth than the consensus forecast of 1.3 percent in 2005.
However, downside risks also loom, as unemployment and
continued wage restraint will continue to weigh on personal
consumption. End Summary.

--------------
Good News: Best Growth in Four Years
--------------


3. (SBU) The German Federal Statistical Office reported that
real economic growth in Germany was 1.7 percent in 2004.
This is the highest growth rate since 2000. About one-third
of the increase was due to "working day effects," as Germans
worked 4.7 days more this year than last. These extra
working days occurred since scheduled holidays fell on
weekends. Economists tend to discount this effect.
However, even the adjusted real growth rate of 1.1 percent
is still the best in four years.

--------------
Positive Side of the Ledger
--------------


4. (SBU) Good news in 2004 was that export growth remained
strong, with net trade contributing 1.2 percentage points to
growth. Enterprise profits rose 10.7 percent, the strongest
jump since reunification. Note that some of these profits

accrued to the self-employed and small businesses as well as
the large corporations. Higher profits could be used to
boost equipment and machinery investment. Indeed, equipment
investment showed the first signs of renewal in 2004,
increasing a slight 1.2 percent after four years of decline.


5. (SBU) Per capita unit labor wage costs fell by 1.3
percent, strengthening Germany's export competitiveness.
According to Goldman Sachs, wage restraint in recent years
has counterbalanced the large increases after reunification,
contributing to renewed German competitiveness in relation
to France.

--------------
The Other Side of the Ledger
--------------


6. (SBU) Private consumption, which needs to rev up to drive
domestic demand, contracted 0.3 percent, pulling down
overall economic growth by 0.2 percentage points. This is
partially the flip side of wage restraint. It also reflects
high unemployment, low employment growth, and the tick up in
savings rate. Construction continued to drag down overall
investment, but the slide of 2.5 percent was less that in
the previous "bust" years that followed the construction
boom.


7. (SBU) The general government deficit was 3.9 percent of
GDP, marking three years in a row that it has exceeded 3
percent. The government was pleased that the deficit did
not hit the high mark it had budgeted. Moreover, the
statistical office has indicated that the numbers are likely
to be revised which Finance Ministry officials claim will be
downwards, with 3.7 percent as the final outturn. More
disturbing is that the federal government and social
assurance programs accounted for 64 percent of the deficit,
not 45 percent as Finance Minister Eichel had committed when
he negotiated with the Federal States. This may weaken his
hand to instill fiscal discipline with the states in the
future.

--------------
And for the New Year - Steady as She Goes?
--------------


8. (SBU) The German Government and European Commission
forecast German real economic growth at 1.7 percent for

2005. The Commission, which had forecast 1.9 percent growth
for 2004, reckoned that slower growth would be due to the
absence of positive calendar effects. In essence, a "steady
as she goes" scenario.


9. (SBU) A local private bank economist also sees no further
increase, but uses for the base the adjusted growth figure
of 1.1 percent growth that does not include the extra
workdays. The consensus forecast is for 1.3 percent real
growth. Our forecast for 2005 of last September puts us in
the same camp as the Commission and the Government (Note:
For the record we had forecast 1.8 percent for 2004).


10. (SBU) The basic forecast scenario is that the net trade
balance will reduce its contribution to growth as world
trade slows, meaning that domestic demand will have to pick
up the slack. Key components of domestic demand are private
consumption and investment. The typical German recovery
starts with exports, moves to investment, then jobs and
consumption. This formula failed to hold in 2004.
Investment growth was soft until the end of the year. If
investment gathers more steam in 2005, which recent surveys
suggest it might, then it would further confirm that the
typical links in German recovery are still be in place, but
with a time lag.

-------------- --------------
2005: Downside Risks and Possible Upside Surprises
-------------- --------------


11. (SBU) The tealeaves are more than muddy for discerning
the outcome for 2005. In our next forecast we will seek to
distill their meaning. A few thoughts, however, come to
mind.


12. (SBU) Downside risks continue to loom. Continued wage
restraint and high unemployment and modest employment gains
suggest personal income increases will remain modest. The
savings rate has been increasing, reflecting (1) consumer
anxieties over the economic outlook and how reforms will
effect their pocketbooks; (2) higher profits of the self-
employed; and (3) consumer recognition that future pensions
can no longer count exclusively on the government pension
system to maintain their current level but will need to be
supplemented with private savings.


13. (SBU) Still, there could be some surprises on the
upside. German Finance Ministry officials, while not
purporting to be even guardedly optimistic, think that if
there are no "negative shocks," 2005 could be a turnaround
year.


14. (SBU) Investment could improve from the baseline
forecasts. In December businessmen became more positive
about the economic outlook, perhaps linked to oil price
declines. Corporates and banks seem to be emerging from
their bouts of restructuring and are showing higher profits.
The slowdown in the diminution of construction activity
could continue (no growth would be a vast improvement over
the steep declines of recent years).


15. (SBU) Private consumption is a major question mark.
Finance Ministry officials point out that the last phase of
the income tax reform kicks in, reducing the top marginal
rate to 42 percent. While a smaller boost than previous
cuts, at least as of January there do not appear to be
increased charges by the social security system that would
offset the tax breaks.


16. (SBU) Consumers' confidence has been buffeted in recent
years. Noisy debates over reforms that affect the
pocketbook (pension, labor, healthcare) and the uncertain
course of economic policy placed an extra premium on
caution. So far, implementation of the labor market reforms
has gone smoothly. The government has opted not to take up
further major reforms until after the 2006 elections,
allowing the system to digest those already adopted. A
senior Finance Ministry official, however, agreed that more
reforms are needed and that Agenda 2010 should be seen as a
process of reform rather than just a one-time reform
package.


17. (SBU) The European Commission presented a similar
scenario in its autumn forecast for Germany. It
hypothesized that smooth implementation of the Hartz IV
labor market reforms "will quickly dispel much of the
uncertainty even of large parts of the population that are
not immediately concerned by the reforms." A more confident
mood in Germany could do wonders.


18. (U) This report coordinated with Embassy Berlin.


19. (U) POC: James Wallar, Treasury Representative, e-mail
wallarjg2@state.gov; tel. 49-(69)-7535-2431, fax 49-(69)-
7535-2238

Bodde