VZCZCXRO1159
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHRL #1538/01 3191224
ZNR UUUUU ZZH
P 141224Z NOV 08
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 2628
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCNMEM/EU MEMBER STATES
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 02 BERLIN 001538 
 
STATE FOR EEB(NELSON),EEB/OMA(SAKAUE, WHITTINGTON), DRL/ILCSR AND 
EUR/AGS 
LABOR FOR ILAB(BRUMFIELD) 
TREASURY FOR ICN(KOHLER),IMB(MURDEN, MONROE, CARNES) AND OASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON GM
 
SUBJECT: GERMANY GOES INTO RECESSION, SMALL STIMULUS ON THE WAY 
 
REF: LEIPZIG 00019,BERLIN 1476 
 
¶1.  SUMMARY.  Germany has slid into recession, and major indicators 
point to a further deterioration.  There are few signs of a 
turnaround in 2009.  As manufacturing orders dry up and industrial 
output sputters, German companies are bracing for a rough ride. 
Despite the negative trends, however, some German companies are 
reporting increased earnings, and Germans are enjoying slightly 
higher wages and lower inflation.  The government's fiscal situation 
is likewise improved over the past year.  The cost of the banking 
rescue plan and Chancellor Merkel's small stimulus proposal, 
however, will impede the goal of balancing the federal budget by 
2011, and there doubts the measures will have the desired 
stimulatory effect.  END SUMMARY. 
 
GLOOMY ECONOMIC INDICATORS 
-------------------------- 
 
¶2.  The global financial crisis has spilled over into Germany's real 
economy, as the country enters its worst recession since 1996. 
Gross domestic product (GDP), which grew by 1.4 percent in the first 
quarter and contracted by 0.4 percent in the second quarter, fell by 
0.5 percent in the third quarter, according to the Federal 
Statistics Office.  The fourth quarter may see another contraction. 
As for 2009, the government's Council of Economic Advisors recently 
revised its growth forecast to zero.  September manufacturing orders 
fell by 8 percent, the steepest drop since reunification. 
Industrial output fell by 3.6 percent in the same month.  Business 
confidence as measured by the IFO Business Climate Survey is at its 
lowest level in five years.  The Frankfurt DAX Index struck a 
52-week low in October, when it closed at 4,014.60.  It has bounced 
back somewhat, but is off some 35 percent since January. 
 
¶3.  The procession of companies reporting troubles is getting 
longer.  Deutsche Post, the parent company of the DHL, predicts 
pretax profits will fall 8 percent in the third quarter, and has cut 
back its earnings forecasts for this year and next.  It is 
announcing a cost-cutting program that will result in thousands of 
layoffs, 9500 of which will be at its subsidiary DHL in the United 
States.  (Note: 8000 job losses are expected at DHL's distribution 
center in Wilmington, Ohio (REFTEL A).)  Automaker BMW said its 
third-quarter profits had dropped 63 percent as the global economic 
turmoil made consumers more reluctant to buy its sports and luxury 
cars.  The company also said the financial crisis made it impossible 
to provide a forecast for the rest of the year.  Reinsurer Munich Re 
reported a net profit of 7 million euros in the July-September 
period, but this was only a tiny fraction of the 1.2 billion euros 
it earned a year earlier.  The Chief Financial Officer remarked that 
a "reliable profit forecast" was not possible in light of ongoing 
market volatility. 
 
ALL DOOM AND GLOOM ? 
-------------------- 
 
¶4.  Some companies are still reporting increased earnings, however. 
For example, Volkswagen's luxury brand, Audi AG, reported that sales 
over the past ten months had risen by 3.3 percent, to 844,700 
vehicles.  The company was confident it would achieve its goal of 
selling one million cars in 2008.  (Volkswagen's CEO has, however, 
predicted a tough year for the auto industry in 2009.) 
 
¶5.  A recent survey by the German research group GfK showed that 
German consumer confidence, though low, had recently inched upwards, 
perhaps due to wage increases negotiated earlier in the year and 
lower energy costs.  Another survey by Germany's ZEW economic 
institute reported that investor sentiment remained depressed in 
October, albeit up from a record low in July.  Depressed demand and 
lower energy costs have caused inflation to cool.  It peaked at 3.3 
percent in July, but came down to around 2.4 percent in October. 
Employment remains robust so far, but may have reached the tipping 
point.  The number of jobless fell below the 3 million mark in 
October to 7.2 percent (down from 7.4 percent in September), the 
lowest since 1992.  (The government predicts, however, the economy 
will shed around 30,000 jobs in 2009 due to the economic slowdown.) 
 
 
¶6.  Lower unemployment and other factors have had a positive effect 
on the national (state and federal) deficit, which in 2007 showed a 
70 million euro surplus, the first in 20 years.  Although still 
slightly in deficit, the federal government expects to finish 2008 
with an additional 400 million euros in tax revenue.  The increase 
is even more pronounced at the state and communal levels, where 
authorities will end up with 7 billion euros more in their coffers, 
 
BERLIN 00001538  002 OF 002 
 
 
mostly as a result of higher business tax revenues.  Current 
estimates for 2009, however, are that federal tax revenues will 
increase by 2.2 billion euros less than was forecast as recently as 
May.  Furthermore, potential liabilities associated with the 500 
billion euro bank rescue plan, as well as the recently proposed 
stimulus plan, will alter the government's fiscal outlook 
significantly. 
 
MERKEL RESPONDS WITH STIMULUS PLAN 
---------------------------------- 
 
¶7.  In response to the discouraging economic indicators, Chancellor 
Angela Merkel's cabinet has approved a package of 15 relatively 
minor measures spread over four years to stimulate the economy and 
protect jobs (REFTEL B).  The measures focus on capital investments, 
and are meant to avoid what some German critics call the "flash in a 
pan" approach taken by the United States earlier this year.  The 
most significant elements include: 15 billion euros of new loans by 
the state-owned development bank Kreditanstalt fuer Wiederaufbau 
(KfW); 3 billion euros for KfW's infrastructure program for needy 
local governments; 3 billion euros for building renovations aimed at 
reducing CO2 emissions; 2 billion euros for various transport 
projects; 200 million euros to boost regional economies; tax cuts 
for small- and medium-sized enterprises (SMEs); and a one-year 
suspension of taxes on new cars (two years for low-emission models). 
 Parts of the package do not represent new money, but rather an 
acceleration of previously planned initiatives; e.g., from 2010 to 
¶2009.  The package will cost 23 billion euros over four years, of 
which only 10.9 billion euros will come out of the federal budget. 
The government thinks the overall economic impact could amount to 50 
billion euros, due to the multiplier effect. 
 
¶8.  The IMF and others agree that Germany could use a fiscal 
stimulus.  The Chancellor's plan, however, has its critics.  The 
German government's own Council of Economic Advisors recently 
commented that the measures were inadequately focused.  The Council 
levied particular criticism at the vehicle tax exemption, which they 
felt would not do much of anything to boost growth.  Others have 
criticized the plan's small overall size.  There will certainly be 
ample debate over the plan's provisions, as most require legislative 
approval.  Meanwhile, the government has given up hope of balancing 
the budget by 2011.  Finance Minister Peer Steinbrueck conceded this 
goal will not be attainable before 2013. 
 
¶9.  Ultimately, global trends may determine Germany's economic 
prospects, as exports account for more than a third of Germany's 
$3.2 trillion economy.  Many of Germany's renowned small- and 
medium- sized enterprises (SMEs) are exporters in their own right, 
but are also integral links in large exporting firms' supply chains. 
 So companies of all sizes will feel the squeeze as global demand 
for their goods falls.  As a result, Germans are paying close 
attention to stimulus efforts in Europe, Asia and the United 
States. 
 
¶10.  This cable was coordinated with Congens Frankfurt and Munich.