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Friday, 7 December, 2001, 11:32 GMT
German industry slumps
The BASF plant in Ludwigshafen
German industry has slashed jobs as profits tumble
Germany's sharp slowdown is deepening as industrial production slumps, raising fears that the economy as a whole will continue to contract.

According to the German government, output crashed 2.1% during October, with energy and durable goods such as cars bearing the brunt of the decline.

It's very difficult to reconcile the worldview on Planet Duisenberg with that of the financial markets

Sonja Gibbs
The figures are even worse than those of September, and far beyond the most pessimistic predictions of economists, indicating a output decline in the 12 months to October of as much as 4%.

The only bright spot was the construction industry, where output rose strongly after an extremely weak September.

These statistics - combined with lower inflation figures - have raised hopes that the European Central Bank will cut interest rates.

Going down

But generally, the figures reinforce the impression that Germany's sharp slowdown is getting worse.

Germany has so far avoided the technical definition of a recession - two consecutive quarters of negative growth - by an extremely narrow margin.

Business confidence is in a deep trough, unemployment at nearly 9% of the working population is sky-high, and the overwhelming majority of observers think the economy will contract again in the fourth quarter of the year.

Other figures released today show that prices are rising more slowly in Germany, up just 1.7% in Germany during the 12 months to November, down from October's 2%.

The rapid slide in oil costs is the main catalyst, the Federal Statistics Office said, causing heating oil prices to fall 26.8% over the year and fuel prices to drop 9.1%.

Without the help of the oil market, the annual inflation rate would have been 2.4%.

ECB inaction

Taken together, the data strengthens the hand of those who say that the European Central Bank is too complacent about prospects for Europe next year and needs to cut interest rates fast.

ECB president Wim Duisenberg
Skewed worldview on Planet Duisenberg?
With inflation in Germany inflation now well within the ECB's preferred ceiling of 2%, the level across the Eurozone is thought to be around 2.1%, and is likely to drop below the threshold early next year.

The US is beginning to show signs that the 11 rate cuts made by the Federal Reserve this year are having an effect, with unemployment dipping and factory orders on the rise.

But comments made by the ECB's president, Wim Duisenberg, after yesterday's decision to keep Eurozone rates on hold at 3.25% worry some economists.

Their concerns are amplified by the slide in output in what has historically been Europe's strongest industrial economy.

Planet Duisenberg

Nomura's Sonja Gibbs believes that the ECB is being far too optimistic in its predictions for European growth, which - pending a revision due later this month - remain at 2-3% for 2002, ahead of that of the US.

"It's very difficult to reconcile the worldview on Planet Duisenberg with that of the financial markets," she told BBC News Online.

"[The ECB] is perceived as not doing what's necessary to stimulate the economy."

The problem, she says, is not necessarily the traditional complaint, that the ECB is obsessed with inflation to the exclusion of all else.

Rather, the ECB seems to think it can ride on the US's coat-tails without significant policy alteration.

"It's all about monetary policy," she said. "Euroland is hit twice: it's not doing enough, and in any case it's less responsive to monetary policy changes."

See also:

27 Nov 01 | Business
Germany 'is already in recession'
22 Nov 01 | Business
Rich countries on the brink
21 Nov 01 | Business
Pessimism worsens among German firms
16 Oct 01 | Business
Jobs woe for German economy
06 Dec 01 | Business
ECB holds rates steady
05 Dec 01 | Business
Germany's slowdown continues
04 Dec 01 | Business
Eurozone confidence slumps
04 Dec 01 | Business
EU eyes German budget deficit
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