Finance counsels

Germany’s recovery from recession came in time to give a boost to Chancellor Angela Merkel’s re- election bid in the Sept. 27 vote. It may not last much longer.

Unemployment is set to jump and consumer spending to fall in 2010 as government stimulus runs out, according to the Halle- based IWH institute, an adviser to the government. Companies are warning of a credit crunch, and debt at a post-World War II high leaves policy makers with few options to counter a double dip.

“The pace of the upswing can’t be maintained,” said Klaus Baader, co-chief European economist at Societe Generale SA in London. “Next year is going to be more difficult, with unemployment rising and government stimulus petering out.”

Exceptional measures of 85 billion euros ($124 billion) lifted spending and subsidized jobs, helping keep unemployment below levels in the U.S. and France, even as the economy suffered its worst post-World War II recession.

The return to growth in the second quarter enabled Merkel, 55, to “exploit” the issue in her campaign, Laurent Bilke, an economist at Nomura International, said in an interview.

Five polls last week gave Merkel’s Christian Democratic Union a lead of between nine and 13 percentage points over her main challenger, Social Democratic Foreign Minister Frank-Walter Steinmeier, 53.

“We’re through the worst,” Laurenz Meyer, economic spokesman in parliament for the CDU, said in an interview. “But the second wave of this crisis has yet to hit us.”

Economic Forecasts

Germany, the world’s biggest exporter, was hammered by the global contraction as sales of Wolfsburg-based Volkswagen AG cars and Munich-based Siemens AG equipment slumped. The government has forecast a 2009 economic contraction of as much as 6 percent.

Spurred by extra spending equal to 1.6 percent of gross domestic product in 2009, the economy grew 0.3 percent in the second quarter, confounding economists’ forecasts. It may expand another 0.8 percent in this quarter. Growth may reach 0.9 percent in 2010, the IWH institute says.

Reflecting the rebound, the benchmark DAX stock index has rallied 56 percent since March 6. Still, German government bonds have outperformed U.S. Treasuries this year on expectations the U.S. economy will grow more strongly.

‘Unusually Moderate’

Germany, Europe’s biggest economy “isn’t out of the woods yet,” Finance Minister Peer Steinbrueck, a Social Democrat, said Sept. 1. The Finance Ministry underlined the point in its monthly report today, when it said the rise in unemployment has been “unusually moderate” so far and that there’s a risk the buildup in joblessness may accelerate.

“It’s still uncertain whether the positive economic signals are already indicating a fundamental and sustainable change toward the better,” the ministry said.

The Christian Democrats have pledged across-the-board tax cuts worth about 15 billion euros and looser labor-market rules making it easier to fire employees. Steinmeier said during a televised debate on Sept. 13 that Merkel has a “credibility problem” over her plan to lower taxes even as debt soars. The Social Democrats propose tax cuts for the lowest incomes and want a universal minimum wage of 7.50 euros an hour.

“The chancellor is not to be envied,” Ulrich Kater, chief economist at Dekabank in Frankfurt, said in an interview allstate insurance. “Having rescued the economy through large government aid programs will soon be forgotten and what’s left is cleaning up the mess.”

Cash for Clunkers

For instance, Germany’s 5 billion-euro “cash-for- clunkers” program, the world’s largest, ended this month, removing support that shoppers have depended upon.

The car-scrapping premium, which was emulated from the U.K. to the U.S., led to a 23 percent increase on spending for vehicles in the first six months. The Federal Statistics Office attributed the second-quarter rebound to those purchases.

There are no signs consumer spending overall has stabilized, the Kiel-based IfW economic institute said in a Sept. 9 report. The results are already being felt.

General Motors Co.’s German Opel unit, one of the main beneficiaries of the subsidy, may shed 4,000 jobs in Germany as part of a plan to cut 10,500 jobs across Europe to return to profitability. As many as 50 auto suppliers face insolvency by the end of this year, according to a study by Roland Berger Strategy Consultants.

Karstadt Store Closures

Insolvent retailer Arcandor AG, which failed in its quest for government aid this year, will cut 3,700 mail-order jobs and close 19 Karstadt department stores under plans unveiled last month by the company’s administrator.

The unemployment rate will jump to 10.3 percent in 2010 from 8.1 percent this year, the IWH institute forecast on Sept. 15. Consumer spending will drop 0.7 percent in 2010 after growing 0.5 percent this year, it said.

Jobs have been subsidized by the Federal Labor Agency, which pays 60 percent of the net wage that’s lost due to reduced working hours. The program, extended to 24 months in May from 18 months, supported about 1.4 million employees at some 50,000 companies as of June.

Holding on to workers with little to do may prove too expensive. Labor costs per working hour rose 4.8 percent in the second quarter from a year earlier, the second-biggest increase after a record 5.3 percent jump in the first three months, the statistics office said Sept. 15.

Long-Term Impact

“It would be a mistake to underestimate the longer-term consequences of the past 18 months,” the BDB association of German banks said in a report on Sept. 9. “It will take three to four years until production is back at a pre-crisis level.”

Adding to the burden, the BGA association of wholesalers and exporters said Sept. 15 that 42 percent of its members expect credit to tighten. Small and mid-sized companies, which provide 70 percent of jobs, will face tougher loan conditions in the first half of 2010, Deputy Economy Minister Hartmut Schauerte said last month.

Faced with such gloom, the next chancellor will have few tools to deploy. Net new borrowing will almost double next year to 86.1 billion euros from a record 47.6 billion euros this year, according to the government budget.

“There’s quite a bit of bad news left to digest,” Elga Bartsch, chief European economist at Morgan Stanley in London, said in an interview. “The challenge for the next government is that its fortunes hinge on economic indicators that trail the business cycle.”

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