Jobs woe for German economy

Putting on a brave face in Munich

By BBC News Online's James Arnold

Munich's Oktoberfest - held traditionally, albeit confusingly in September - was a more dismal affair than usual this year.

German job cuts this year

Siemens: 15,000

Hypovereinsbank: 7,500

Infineon: 5,000

BASF: 4,000

Bayer: 4,000

Commerzbank: 3,400

Deutsche Bank: 2,600

Adam Opel: 2,500

Dresdner Bank: 1,500

Epcos: 750

Beer consumption, that key indicator of economic sentiment, was down by an unprecedented 20%.

Germany's economy was already stuttering dangerously ahead of the 11 September attacks on the US.

Now, with the country's top companies announcing a swathe of job losses, the mood is grimmer than it has been for years.

As economists slash their forecasts, fears are mounting that the country's current slowdown could become a prolonged and painful slump.

The mood darkens...

After starting the year amid modest cheer, the German economy has nose-dived in the past few months.

In the latest of a series of downward forecast revisions, the BDB banking association cut its 2001 growth outlook to just 0.8%, from the previous 1-1.5%.

Banks have seen the most vicious cuts

Even the more sanguine government is reportedly lowering its own forecast for next year's growth from 2.25% to 1.5%.

Although both figures are still in positive territory, most forecasters now say the last few months of this year will show zero or even negative growth - a full recession even by the strictest definition of the word.

... as jobs are slashed

But what is really troubling Germans is the realisation that macroeconomic woe is filtering through to the real economy.

Like their counterparts elsewhere, German firms have unloaded tens of thousands of job losses in the past few months - a trend that has gathered pace since the US attacks.

On Monday, Siemens and Commerzbank, two of Germany's best-known firms, announced more than 10,000 fresh lay-offs, over and above thousands unveiled earlier in the year.

And while workers in the US or UK may be hardened to such realities, slashing staff is a political hot potato in Germany, where labour rights take a higher profile.

Commerzbank claimed that its redundancies were the first it had ever made in its 130-year history.

Now Germany's unemployment rate is, at more than 9%, above the eurozone average.

Feeling nervous

Unsurprisingly, this has taken its toll on confidence.

Not all Germans are feeling so cheerful

Business sentiment, as measured by the influential Ifo index, was already at a five-year low in midsummer, and has fallen again since the attacks.

The consumer is also gloomy.

Retail sales, which have slouched along all year, took a bigger-than-expected tumble in September.

German retailers, already in the doldrums, have announced a series of dire results - most recently electronics retailer ProMarkt, a subsidiary of Britain's Kingfisher, which saw losses double thanks to slowing demand.

Tokyo-am-Main?

But will the current slowdown become a slump?

For Europe as a whole, the question is crucial.

Germany accounts for 30% of the European Union's economic output, so a recession there will inevitably spread around the region.

Some fear that prolonged stagnation in Europe's biggest economy could see Germany fall into the same lamentable position as Japan - a mammoth, industrialised, fundamentally rich economy that cannot be kicked into life by any amount of government effort,

Reasons to be cheerful

But the Germany-as-Japan scenario is still a little far-fetched.

Interest rates in the eurozone still have a long way to fall: the European Central Bank opted not to cut at its last meeting, but is believed certain to do so soon.

Mr Schroeder lets matters take their own course

And while the job cuts are causing short-term pain, economists take heart from the fact that they are happening at all.

One of the factors that has kept Japan in stagnation has been its companies' persistent failure to trim their fat; German industry is arguably over-staffed at present, and should emerge leaner and fitter from the current crisis.

More to the point, Germany remains strongly competitive. Although its business costs are high, it is seen as a highly productive place to invest, thanks to its world-class infrastructure and peerless skills-base.

Car giant BMW recently opted to locate a new £600m plant at home, turning down cheaper offers from Eastern Europe.

Laisser-faire

The main cause for optimism is the admirably cautious approach of the German government.

While its counterparts around the world have lined up expensive - and potentially wasteful - economic stimulus packages, Chancellor Gerhard Schroeder's administration has clung to laisser-faire.

Mr Schroeder has repeatedly denied press reports that he is planning a state-sponsored economic boost, admitting only that he might look again at the tax regime later in the year - a measure that was in any case on the cards.

After decades of government coddling of domestic industry, allowing corporate Germany to work out its own problems could be the sort of stringency that the economy needs.