Slow German Growth Takes Toll in Europe

THE German economy - that rock of stability in the middle of Europe - is showing serious cracks.

Some economists here say Germany is in a period of "stagnation." Others term it a "marked slowdown." The chief economist of Germany's mighty Deutsche Bank even ventures to label it out-and-out "recession," a word of last resort for the conservative Germans.

Whatever it's called, though, "it's clearly not good," says Friederich Klau, who tracks the German economy for the Organization for Economic Cooperation and Development (OECD) in Paris.

To begin with, it is not good for Germany's trading partners. During the last two years, says Mr. Klau, Germany was a "stabilizer" in the European Community (EC). In contrast to most of the industrialized world, the west German economy boomed as it tried to meet enormous demand for goods and services in east Germany. Unable to do this alone, it relied increasingly on imports - which its weaker trading partners were happy to supply.

This year, however, "the German impulse will run out. You are not going to see the import increases of 15 or 20 percent as we had," says Siegfried Utzig, economist for the Federation of German Industry, the country's major industrial association. That is sobering news for countries like Britain, which is still in a recession. Neither is this encouraging for Central and Eastern Europe, which are looking to the EC for markets and aid.

A combination of factors is slowing the German economic locomotive. Demand and supply between east and west Germany have evened out: After cranking itself up, the richer half of the country finally reached a point where it could supply the poorer half without having to expand further.

At the same time, the Bundesbank has been steadily raising interest rates in its fight against inflation, which is now at 4 percent. But this has braked the economy, dampening consumer spending and business investment. The Bundesbank's policy has had another negative effect: strengthening the deutsche mark. A stronger mark makes German goods more expensive overseas. Exports are Germany's bread and butter, and they have declined, not only because of the strong mark, but also because of weaker markets in c ountries hit by recession.

By common definition in the United States, the economy here is in a recession, because gross national product has fallen for two consecutive quarters compared with the preceeding periods (it fell 0.5 percent in the second and third quarters of 1991). At this time last year, GNP growth in western Germany was roaring at 4 to 5 percent. Predictions for growth this year are in the 1.5 to 2 percent range.

Germans define recession differently, but semantics aside, "there are more signs of weakness than of strength" in the German economy, says the OECD's Klau. Capital spending has dropped sharply; exports are down (orders for machine tools - Germany's pride and joy - are down 20 percent); the housing and retailing industries, which are both highly sensitive to interest rates, are weakening.

What shakes the Bundesbank now is the prospect of a 10.5 percent wage hike being demanded by I. G. Metall, the principal manufacturing union, in this winter's round of negotiations. This comes on top of union wage hikes last year of 6 to 7 percent. The unions argue that their gains of last year were eaten away by inflation and a massive one-year-only special tax hike to help pay for reunification. The steelworkers have threatened a strike and expect to make a decision today.

Employers are gearing up for a fight. The Economics Ministry, for instance, has proposed capping civil servants' pay, causing a political uproar. However, both the government and industry will be in a strong bargaining position, says economist Utzig, because they can point to the dangers of a slowing economy and a federal budget stretched by reunification expenses.

If the unions succeed in making gains above 6 percent, the resulting inflation will force the Bundesbank to increase interest rates again, and then Germany can expect a "true" recession in the second half of this year, Utzig warns.

Despite all the high-volume talk of a bad economy (which is to be expected before a major round of wage negotiations), the economic picture here is in no way comparable to the situation in the US, for instance. On the surface, everything in western Germany appears normal, with Mercedes Benzes still roaring over the autobahns.

Most economists expect the period of slow growth to turn around in the second half of this year, if wages do not soar. By that time, they hope, the east German economy will have begun its climb out of the valley and will be on the way to becoming a mini-economic engine of its own. They also hope that the world economy will be better off, with foreigners knocking on the doors of German exporters once again.