Business World

Sunday 22 September 2019

Germany lines up stimulus plan to fight off recession

German Chancellor Angela Merkel. Photo: AP Photo/Czarek Sokolowski
German Chancellor Angela Merkel. Photo: AP Photo/Czarek Sokolowski

Birgit Jennen

The German government is getting ready to act to shore up Europe's largest economy, preparing fiscal stimulus measures that could be triggered by a deep recession, according to two people with direct knowledge of the matter.

Germany's central bank, the Bundesbank, warned yesterday that the country is likely to fall into recession.

Please log in or register with Independent.ie for free access to this article.

Log In

The programme would be designed to bolster the economy and consumer spending, to prevent large-scale unemployment, said the people.

Similar to bonuses granted in the 2009 crisis to prod Germans to buy new cars, the government is studying incentives to improve energy efficiency of homes, promote short-term hiring and boost income through social welfare, the people said. Bunds extended declines, while the euro briefly rose 0.2pc to $1.1114 before slipping back.

Signs are mounting that Germany's rigid adherence to its balanced-budget policy is softening. On Sunday, finance minister Olaf Scholz suggested the government would aim to muster €50bn of extra spending in case of an economic crisis. Last week, chancellor Angela Merkel said the economy was "heading into a difficult phase", and her government will react "depending on the situation".

The central bank warned that the economy could be about to slip into recession, adding to the pressure on policymakers to ramp up support.

With the economy slowing sharply and Ms Merkel's coalition increasingly unpopular, pressure has increased to open the purse strings. Sticking to a balanced-budget policy for roughly a decade has allowed Germany to slash public debt to 60pc of GDP, from 83pc.

Still, the hurdles for a stimulus programme are high. The government requires the lower house of parliament to declare a crisis so it can issue debt beyond the normal guidelines allowed during a recession.

Without a sense of wide-spread malaise, that approval could be difficult to justify, and Germany is still officially predicting an economic recovery before the end of the year.

Even with German output contracting in the second quarter, officials in Ms Merkel's administration are wary that a knee-jerk spending spree would fuel imports and savings, rather than bolster industrial output and protect jobs, said the people.

Industrial capacity utilisation would have to drop significantly for fiscal stimulus to have a meaningful impact, they said. Currently, spending in the amount of 1pc of gross domestic product would boost growth by less than 0.5 percentage points, a ratio they consider insufficient.

Bloomberg

Irish Independent

Also in Business