New German gov't may benefit from a rebound

A growing number of economists believe the German economy could rebound from its deepest post-war recession to achieve growth rates of three percent or more next year if foreign demand continues to pick up and the labor market holds firm.

A rapid return to growth may mean the incoming government will face less of a budgetary headache, creating scope to deliver on election promises like tax cuts, bolstering incentives for child-raising and investment in green technology.

German Chancellor Angela Merkel is vying for a second term in a Sept. 27 election which polls show could produce a center-right alliance of her conservatives and the business-friendly Free Democrats (FDP).

“I don't think the politicians are going to be able to believe their luck,” said Adolf Rosenstock, an analyst at Gebser & Partner Asset Management in Frankfurt, who predicts the German economy will grow by 3.1 percent in 2010.

The government has forecast 2010 growth of just 0.5 percent.

Battered by a collapse in exports, Germany slumped to a record contraction in gross domestic product (GDP) of 3.5 percent in the first quarter of 2009.

That sowed fears the next government would enter 2010 saddled with record debts and spiralling unemployment, tying its hands as consumers battened down the hatches over job worries.

But figures this month showed the economy exited recession in the second quarter. This, combined with rising business sentiment, perkier exports and a surprisingly resilient jobs market are leading forecasters to reassess.

“The German bounce back is going to lead the way for Europe in our view,” said Greg Fuzesi, an economist at JP Morgan, which is now predicting German growth of 3.6 percent next year, the strongest rate since 1991.

Not everyone is so optimistic.

Gustav Adolf Horn, director of the IMK economic research institute, said Germany's success in stemming job losses by subsidizing shortened working hours could not last.

He believes a new government will have to consider a third economic stimulus package if firms fire more workers after the vote, hitting consumer spending.

“The first task of the new government will be to overcome this crisis. It's not been dealt with yet,” he told Reuters. “We've reached the bottom of the downturn in industrial output. But we've not reached the bottom for the job market.”

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