Is the German economy coming out of recession?

German economy

Germany is the largest national economy in Europe, the fourth largest by nominal GDP in the world and fifth by GDP in 2008. But that didn't stop it being hit by the economic crisis. As Germany is the largest national economy in Europe, it's important that it comes out of the recession fully intact.

According to a report which came out, German business confidence increased more than economists forecast, leading it to a 15-month high in November.

The monthly business climate index compiled by the Ifo economic research institute rose by a bigger-than-expected 1.9 points to 93.9, the eighth consecutive increase, BusinessWeek reports. Business managers were also more upbeat about the outlook for the coming six months than they had been in October, according to a corporate survey on which the index, one of of Germany's most important economic indicators, is based.

Economic growth accelerated in the third quarter as companies replenished inventories and rising export orders prompted factories to ramp up production, Bloomberg stated.

The manufacturing industry expanded for a second month in November and the country's benchmark DAX share index has advanced 20 percent this year. Unemployment, the euro's strength and the expiry of government stimulus measures may still damp growth in 2010.

The Economy Ministry last month raised its economic outlook, forecasting growth of 1.2 percent in 2010 after a five percent contraction this year.

"It looks like the German economy is on the path to recovery," Ifo economist Gernot Nerb said in a Bloomberg Television interview. "This time it was particularly the manufacturing industry that showed improvement in the business climate."

Stimulate growth

Chancellor Angela Merkel's government is spending around 85 billion euros on measures to stimulate growth, including infrastructure projects and a 2500-euro payment for people who junk an old car and buy a new one. The so-called cash-for-clunkers fund ran dry in September.

German investor confidence declined more than economists forecast this month.

"Consumer spending will remain weak because of rising unemployment but it won't collapse," Ralph Solveen, an economist at Commerzbank said. "Consumption won't help drive growth in 2010. The impetus will instead come from exports but also from investments."

Economists at Commerzbank and Citibank now expect growth to accelerate slightly to around 0.8 percent in the final quarter of 2009. Despite the improvement, unemployment is expected to rise next year as companies hit by the crisis restructure and lay off workers.

Bundesbank President Axel Weber said to Bloomberg, that the German economy is on the brink of a sustainable recovery.

"The investment dynamic has developed a bit better than expected," Weber said in Leipzig today. "We're not yet out of a crisis scenario. Germany is on the brink of a sustainable economic recovery, but it will still take a while."

Will it recover in 2010?

Despite exports recovering and business sentiment increasing, leading analyst, Timo Klein, Senior Economist at IHS Global Insight in the forthcoming issue of the magazine CXO, believes that the German economy is set to take a dip in 2010.

He states "I'd say there is now a reasonable degree of stability, due, not least, to major monetary and fiscal policy measures. But the whole thing is still relatively fragile. Because it relies on world trade and the stimulus that has come from both government and the central bank. If that were to be withdrawn, within the next few months that would most likely lead to a collapse into recessionary conditions."

Klein believes that proper sustained growth recovery won't begin until late in 2010, when the wider global economic recovery provides long term opportunities for Germany to be able to fully recover.

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