Europe’s strong man starts to falter

 

A group of leading think tanks in Germany have cut growth forecasts for the country and warned of recession.

The economic institutes said Europe's biggest economy would only grow 1% next year instead of the 2% they had been expecting six months ago.

But this assumes that the crisis in the eurozone does not worsen.

They also criticised the European Central Bank's latest initiative to ward off the crisis, saying its debt purchases risked fuelling inflation.

Last month the ECB unveiled plans to buy up the government debts of struggling eurozone members, but only if those governments first signed up to a rescue package, including strict conditions on cutting their overspending and reforming their economies.

Some analysts are concerned that in the longer term there is a great danger that the ECB will continue to purchase bonds and provide excessive monetary policy stimulation even if states deviate from the adjustment programmes, which could drive up prices and lead to an increase in inflation expectations.

The eurozone's woes, coupled with a general slowdown in global growth, is now impacting on business confidence and investment in Germany, despite the fact that German exports had continued to hold up, thanks in large part to the competitive price edge afforded to them by a weaker euro.

Over the forecasting period as a whole the downside risks prevail and there is a great danger that Germany will fall into a recession with unemployment in Germany rising from its current 20-year low of 6.2% to 6.8% next year.

Germany is Europe's biggest single national economy, and until now has been faring far better than almost every other eurozone member.

A German recession could sap business confidence across the eurozone even further, and would hit the other eurozone members more directly if their exports to Germany fell.

Elsewhere, data from the rest of the eurozone continues to paint a grim picture.

Consumer prices inflation in Spain rose to a 16-month high in September of 3.4%. High inflation is particularly unwelcome in a country that is already struggling with shrinking incomes and uncompetitively high wage costs within the eurozone.

It will also make it even harder for the government to cut its overspending from 8.9% of Spanish economic output this year to 4.5% in 2013, as Spanish state pensions are indexed to the inflation rate.

Meanwhile in Greece, the unemployment rate rose above 25% for the first time in July, according to the Greek statistics office.

The record 25.1% was up from 18% a year ago. The unemployment rate in Spain is also 25%.

The poor state of the eurozone, along with the risk of massive automatic government spending cuts in the US early next year, prompted the IMF  to issue yet another warning about the state of the global economy last week.

"Whether you turn to Europe, to the United States of America, to other places as well, there is a level of uncertainty that is hampering decision makers from investing, from creating jobs".