German economy in sharp recession: Bundesbank

The central bank of the Federal Republic of Germany, Bundesbank, say that the German economy is currently in a sharp recession and although it is likely to ease during the course of 2009, it does not look like there will be a significant upturn in the near future.

Forecasting a more gloomy economic scenario than the government's own forecast, the bank said in its June 2009 monthly report, ''The global economic downturn, accompanied by an unexpectedly severe contraction in international trade, led to a very strong decline in Germany's economic output in the winter half-year of 2008-09.''

Overall output
According to the new Bundesbank projection, there will be a 6.2 per cent fall in gross domestic product (GDP) in 2009, which is due to the massive economic downturn in the winter half-year of 2008-09.

Germany's GDP had shrunk by 2.2 per cent in the final quarter last year, a time when the country entered into recession and fell by 3.8 per cent in the first quarter of this year.

The government had forecast in April that the GDP of the world's fourth largest economy and Europe's biggest, would contract by a record of 6 per cent this year but would see a marginal growth of 0.5 per cent in 2010, while the country's central bank expects no growth in 2010.

The Bundesbank said that with the gradual easing of tensions in the international financial markets, improved expectations and with the support of extensive monetary and fiscal stimuli, the German economy could regain some ground in the third quarter of 2009.

Economic activity is expected to remain at a subdued level in 2010, despite picking up slightly in the course of the year. It said that there will be a marked fall in overall capacity utilisation, which will result in the German economy enter a period of major cyclical underutilisation in 2010.

The German economy is heavily export-oriented and its exports and investment spending plunged in the first quarter, dragging Europe's largest economy into its deepest economic slump on record.

Exports were down 9.7 per cent from the fourth quarter and company investment declined 7.9 per cent, according to the Federal Statistics Office.

Labour market
So far, the German labour market has shown only a moderate reaction to the marked decline in overall economic activity. This is due mainly to the fact that, to a large extent, labour input has been adjusted to declining production by reducing working hours.

However, the central bank predicts more job cuts and a faster rise in unemployment in the coming quarters.

The number of people employed during the first quarter in Germany was 39.9 million,  an increase by 48 000 compared to the same quarter last year. The number of unemployed as defined by the International Labour Organisation, was just under 3.4 million, which is 7.8 per cent of the entire economically active population.

The Bundesbank said that unemployment is likely to increase by more than 1 million to 4.4 million on an annual average in 2010, which will take the unemployment rate to10.5 per cent.

Prices
The German central bank said that the year-on-year consumer price inflation will temporarily enter negative territory over the next few months as a delayed reaction to the sharp increase in energy and food prices into the third quarter of 2008 and its subsequent partial correction.
 
The medium-term price trend will probably remain positive, however. As a result, the year-on-year rates are likely to go up again towards the end of 2009.

It forecasts that on an annual basis, the general price level will remain stable in 2009, although it will probably rise again by 0.5 per cent in 2010.