MNI INTERVIEW: German Technical Recession Seen As Inevitable

By Luke Heighton

     HAMBURG(MNI) - Germany's slide into technical recession is now inevitable,

the head of a prominent think tank told MNI in an interview, adding that

demographic and technological change, coupled with persistent low inflation,

spell trouble ahead despite strong economic fundamentals.

     "From a technical point of view we are certainly sliding into a recession,

two subsequent quarters of negative growth, so it's inevitable. But I don't

assess the German economy as doing so badly, because the utilisation of capacity

is still very high, we have almost full employment," said Henning Voepel,

director of the Hamburg Institute of International Economics, "We are not

becoming the sick man of Europe again."

     Services strength should continue over the next year, particularly if

geopolitical risks and uncertainty ease, and a manufacturing slowdown does not

feed through to the labour market, he said.

     But Germany's longer-term growth prospects are dimmer, as its industrial

base faces both a worsening global outlook and trade tensions which could affect

sales and hamper its supply chains, as well as structural changes in demand due

to evolving technologies, as in the case of the car industry.

     "Uncertainty is clearly dampening global investment demand, that in turn is

directly transmitted to the German economy through our manufacturing and exports

sectors," Voepel said.

     Should Germany experience a severe and sustained downturn, the economist

said the EUR 50 billion recently pledged by the government as stimulus is

unlikely to be enough.

     "I think we should announce a longer-term programme of public investment

over at least the next 10 years in order to align private investments. Just to

give a fiscal stimulus is not enough. But we should also avoid financing

overcapacities in some sectors, and then in two or three years we have to adjust

to that."

     --DEBT TRAP

     If debt-financed stimulus - combined with central bank bond-buying - is

excessive, it might just store up trouble, he said.

     "It could eventually lead to low inflation plus negative interest rates and

plus increased debt levels with no chance any more to overcome that dilemma that

we have witnessed in Japan, being stuck in a combined liquidity and investment

trap. It would possibly be the next logical step but on a one-way to the next

crisis."

     Short-term interest rates will remain "very low" for at least the next 10

years, according to Voepel, although in 15 years "we should be back in normal

times."

     "We have seen throughout history that in periods of political and

technological transition there has always been a slowdown and a decline in

productivity growth, and then 10 or 20 years afterwards there are huge amounts

of investments driving interest rates up."

     In the meantime, central banks could unintentionally contribute to a delay

in structural change, he said, as ultra-easy monetary policy keeps alive

industries and business models which under different circumstances would exit

the market. Nor will monetary policy alone allow the ECB to achieve its

inflation target of close to but below 2%, with interest rates already close to

the lower bound.

     "I think the ECB will conduct a much more expansionary monetary policy,

because sliding into a Japanese scenario would be awful for the European

economy, especially within a monetary union, and overcoming it would be even

harder than it is for Japan because policy coordination is more unlikely with

autonomous fiscal policy," he said.

     "We will see much more of the ECB, sooner than later. But I think we should

think about a more expansionary fiscal policy to make monetary policy more

effective," he said.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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