Germany's economy appears to be gaining steam despite mounting worries the fiscal troubles in countries along the euro-zone's fringe could undermine Europe's recovery.
Germany's economy, the driver of the European economy, is likely to expand at a 3% to 4% rate this quarter, economists say, a forecast supported by a string of strong reports on employment, consumer spending and manufacturing Tuesday. Lower interest rates and a weaker euro have propelled Germany's investment and export-driven economy.
The recovery could still falter, analysts warn. Just as the U.S. subprime-mortgage crisis thwarted Germany's expansion two years ago, Europe's brewing financial contagion could hamper growth if German banks face extensive losses and are unable to extend credit to industry and households. Other countries in Europe face years of weak growth or recession, making Germany vulnerable to any slowdown in markets including China or the U.S.
Still, while the German public was strongly opposed to rescuing Greece, and its central bank is openly at odds with the European Central Bank's decision to purchase Greek and other struggling countries' debt, from an economic standpoint it has little to complain about.
"As a firm, we're always one of the very first to experience the first affects of a crisis," says Dietmar Ahl, chief executive of Günther Bechtold GmbH, a Bavaria-based sheet metal processor and manufacturer. "That also has the benefit of making us one of the first to see a recovery. And that's what's happening right now."
Business should be up 25% this year, Mr. Ahl says, after falling almost 50% between 2007 and 2009. The company has been able to add some temporary workers to its 66-person staff.
German unemployment fell 45,000 in May, more than twice the drop expected by economists, bringing the unemployment rate down to 7.7%, the lowest since December 2008. The EU-harmonized figure is even lower at just over 7%.
The German numbers highlight the divide between its economy and that of the greater euro zone. The European Union's Eurostat agency said Tuesday that unemployment across the 16 countries that share the euro rose to 10.1% in April, its highest level in 12 years, driven by increases in Spain, Portugal, Ireland and Italy. But Eurostat said there are signs the jobless rate may be close to peaking after only 25,000 people joined jobless queues in April, the second-smallest increase since March 2008.
German manufacturing slowed in May, according to purchasing manager reports released Tuesday by Markit, but continues to expand at a healthy pace. Factory output slowed more markedly in the euro zone as a whole, highlighting the region's fragility.
"The short-term outlook is very favorable" for Germany, said Alexander Koch, economist at UniCredit Group. He thinks Germany's GDP could swell 4%, at an annualized rate, this quarter. "The momentum is strong, which bodes well for the labor market in coming months," Mr. Koch says.
JPMorgan Chase expects Germany's GDP to expand 3% this quarter, though that could be revised higher in light of recent data, economist Greg Fuzesi says. That should propel euro zone growth to around 3% this quarter as well, Mr. Fuzesi says. GDP in the currency bloc advanced just 0.8%, at an annualized rate, last quarter, well below growth rates seen in the US and developing countries such as China and India.
The total number of German unemployed fell last month to 3.24 million. It was once feared that unemployment would top four million or even five million. The labor market is one area where Germany has outperformed the U.S., where the jobless rate is 9.9% despite strong economic growth at the end of 2009 and early 2010.
A number of forces are at work here, economists say. The Germany statistics office changed the way it classifies unemployed people who are using employment agencies, which reduced the reported numbers of unemployed. Government subsidy programs aimed at keeping people in their jobs by paying part of their wages and employment taxes kept as many as 500,000 from going on the jobless rolls, some economists estimate.
The number of people on Germany's subsidized work program, known as Kurzarbeit, has fallen roughly in half since it peaked at 1.5 million one year ago.
That suggests a gamble Germany made at the start of the crisis is paying off. Kurzarbeit has been in place for decades, but the government expanded the program during the recent recession. Critics warned that by keeping people in their jobs, the government was simply delaying an inevitable adjustment that would have to come in order for Germany to stay competitive with other economic powerhouses including the U.S. and China.
But now that global trade is recovering, German exporters have the staff, and expertise, on hand to meet demand.
"Right now, the Germany industry is starting to heal itself very slowly," says Matthias Freund, who owns Freund Human Resources Consulting, which focuses on management recruitment. "Firms are starting to hire employees again, and you can sense that the business climate is getting better."
Europe's debt crisis could still derail expansion, because German banks are heavily exposed to the debt of at-risk peripheral countries like Greece, Portugal and Ireland. But for now a weaker euro is shielding the economy from financial turbulence. The euro now fetches around $1.23 against the U.S. dollar, down more than 15% since December.
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