Germany Will Remain Europe's Economic Powerhouse

While 100,000 people party at Oktoberfest, it's unlikely they'll be dwelling on the country's gross domestic product. But some in the German government may be hoping that the beer consumption adds a little bit to economic output.


Germany is the traditional driving economy of the European Union. But with contracting economic growth figures for the second quarter of this year and predictions from the European Commission that the country could fall into recession in the third quarter, that title is starting to be questioned.

If the country does go into recession in the third quarter, it would be Germany's first recession in over a decade, as high fuel and food prices weigh, and the financial crisis in the U.S. takes its toll.

German GDP (growth domestic product) declined by 0.5 percent in the second quarter.

This is in sharp contrast to the rocketing growth Germany experienced in the first quarter of 2008, increasing 1.5 percent, something it hasn't done in 12 years.

But it's doubtful it would fall behind another EU member in economic output, experts said.

Overall consensus from economists questioned by revealed that Germany will remain the leading European economy and the driver for the EU economy as a whole, even if it experiences a short technical recession.

"I do not believe a recession would topple Germany from its position, as Europe in general could be in a recession in Q2-Q3, so we are all in the boat together," Charles Dumas, director at Lombard Street Research, told

Manufacturing and Wages

Germany was last in a real recession in 1992 and 1993 as a result of an economic hangover after the unification of East and West Germany in 1990.

It accounts for a third of Euro Zone activity and has the biggest population, noted Stuart Bennet, economist from Calyon.

"Its broad manufacturing base and competitive wage structure have helped the country to face up to global challenges and to steal a march on its EU rivals," Kenneth Broux, economist at Lloyds TSB said.

Germany has already been through a major restructuring process and will go into the downturn in better shape than its European counterparts, according to Peter Dixon, economist from Commerzbank.

"Germany is still benefiting from reforms put into place in the labor market and social security and tax systems in past years, as well as moderate wage growth," agreed Dr. Marco Bargel, chief economist at Postbank.

"Moreover, Germany does not face problems resulting from overheated real estate markets as is the case in many other European countries," he added.

German finance minister, Peer Steinbrueck last week said German banks were coping with the financial crisis better than lenders in the United States and Britain.

Steinbrueck acknowledged that the "severe" banking crisis would cause a slowdown in economic activity and that German growth next year of between 1 and 1.2 percent was realistic.

The government's official forecast for German expansion in 2009 is 1.2 percent, after 1.7 percent growth in 2008.

Still Top of the Class

According to Postbank's research, the German economy will still outperform the euro zone as a whole in terms of growth this year and next.

"Productivity gains and growing market share overseas means Germany is well positioned to benefit from a falling euro once overseas demand recovers. Typically, a decline on the scale we've seen in oil prices should also bolster business and consumer morale," Broux said on why the GDP growth contractions will not affect the country overall.

Economists agreed that although the German economy is not doing particularly well at the present moment, other Euro Zone economies are doing worse.

"It (Germany) will remain in the driving seat even if the direction over the next couple of years is downward," Stuart Bennet, economist from Calyon said.

"The only alternative to Germany within the EMU is France. In the not too distant past when Germany has stuttered, France has taken up the slack. But with the housing market and government consumption likely to be subdued, this seems less likely now," Bennet said