MNI INTERVIEW: Lower Dollar May Drag On Germany: Ifo Chief

By Luke Heighton

     MUNICH (MNI) - Manufacturing weakness in Europe's largest economy is

starting to spill over into services, even if overall growth looks set to pick

up next year, the head of the Munich-based ifo Institute for Economic Research

told MNI, warning that U.S. interest rate cuts and a lower dollar could add to

drags on both Germany and the eurozone.

     "What we observe is problems in the manufacturing sector. We have a very

strong construction industry, very strong domestic consumption demand, and

public spending is expanding, so we really have a divided economy," ifo chief

Clemens Fuest said in an interview, in which he characterised the economy as

"not completely bad, but certainly not healthy," and called for more of a fiscal

contribution to demand.

     "If we look at logistics, we see activity weakening there, and surveys show

that there is an impact in service sectors that are close to manufacturing."

     Yet the current economic slowdown should still be considered a "soft patch"

rather than the first signs of recession, Fuest said, with growth rates expected

to pick up next year. This assessment is based on the assumption of a soft

Brexit, and the absence of a trade war between the U.S. and Europe, he noted.

     Another danger comes from U.S. monetary easing, with the Federal Reserve

expected to cut interest rates next week. Any resulting dip in the dollar would

"of course have a contractionary effect" on Germany and Europe's economies,

Fuest said.

     "It means that if there were a downturn in the U.S. - which isn't very

likely at the moment - and a change in the Fed's policies, that could have a

significant spillover effect for Europe. We certainly shouldn't expect much

stimulus coming from the outside at the moment."

     Also of concern are domestic policies and investment, with Germany's

simultaneous transition away from coal and nuclear power and towards greener

alternatives proving particularly challenging.

     "There is a question mark over future energy security," Fuest explained.

"That causes uncertainty, which in turn undermines particular manufacturing

sectors. We no longer have employment growth in the manufacturing sector, [we're

seeing] value-added declines, so we really have a problem there.

     --ENERGY, CHINA RISKS

     "We need a consistent, long-term concept for Germany's energy policy. The

introduction of a carbon dioxide tax or the extension of emissions-trading

certificates are fine, but we need a reliable framework so that people know what

the conditions will be and can invest accordingly. These are key issues for

German industry."

     A sustained decline in China's growth rate would also have severe

consequences both for Germany and the eurozone, Fuest said, though some of its

negative effects could be offset through greater domestic investment and

structural reform.

     "Germany is clearly the European country most exposed to China, and

emerging economy growth rates are very much correlated with Chinese growth

rates. A downturn in China could cause a global crisis and Germany would be one

of the countries suffering most, so it's a major risk."

     Germany's public sector, notoriously reluctant to borrow to spend, should

dip deeper into its pockets, Fuest said, noting that while the government cannot

do much to address shortfalls in foreign demand, beyond working to avoid trade

wars, there is "room to cut income tax, to invest in infrastructure, including

digital infrastructure."

     "Germany does not lack the money - there are billions lying around waiting

to be spent - it's more a question of political resistance to spending and local

resistance to large-scale infrastructure projects. But the debt brake is

precisely not the problem - the money is available."

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

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