West Germany unruffled by dollar decline
Frankfurt, West Germany
WEST German exporters so far are not troubled by the decline in the dollar. This week the dollar fell below 2.8 marks -- the first time this has happened in 13 months.
``We feel confident that down to 2.40 to 2.50 deutsche marks per dollar, the German export industry can well live,'' an economist at Commerzbank here says.
Exports -- everything from machine tools to Mercedes sedans to industrial chemicals -- are important to the West German economy.
They have been the main driving force behind the German recovery that began in early 1983. This year, Commerzbank expects a trade surplus of more than 80 billion DM ($27.8 billion) and a current-account surplus (this includes investment earnings, tourism, and other things, as well as trade) of some 30 to 35 billion DM.
Exporters had been warned time and time again by the Bundesbank, Germany's central bank, and various economic institutes that the extraordinary strength of the dollar -- it hit an average of 3.25 DM in the first quarter of this year -- could not last.
``Nobody was so imprudent as to base his manufacturing capacity for exports on a dollar worth more than 3 DM,'' the Commerzbank economist noted. Exporters just reaped ``fantastic'' profits. Now profits will be more modest, and German companies will have to look more to their domestic market for expansion in sales.
Most German economists are expecting relatively slow growth in their nation's output of goods and services. Commerzbank, for example, talks of 2.3 to 2.5 percent growth in gross national product this year. The Institute for the World Economy at the University of Kiel predicts 3 percent. Dr. Eberhard Dettweiler, at the Bank f"ur Gemeinwirtshaft, says 2.5 percent.
Referring to a 2.5 percent growth, Dr. R"udiger von Rosen, a Bundesbank official commented: ``That is not bad. We are not unhappy with economic developments.'' He pointed out that, because of the departure of 150,000 foreign workers and a declining population, growth is running at 3 to 3.5 percent on a per capita basis.
One troublesome area is the construction industry, where the pace has slipped 20 percent from its last peak.
That, Dr. Dettweiler figures, may be caused by a declining population and high interest rates -- high, that is, when compared with rates in the 1960s and the start of the '70s, when the German economy boomed.
Last week the Bundesbank made some technical moves to ease interest rates, a move that could help the building industry. Lower interest rates in the United States and the strengthening of the mark by more than 15 percent since winter make an easier monetary policy more feasible, economists say. The nation's money supply has been growing lately at 4.5 percent, well within the Bundesbank's target of 3 to 5 percent. Inflation is running at only a 2.3 percent rate.
Neither the Bundesbank nor the federal government, however, is expected to make any substantial moves to loosen economic policy. The Bundesbank does not want to reignite inflation. The government does not want to boost its budget deficit of 25 billion DM ($8.7 billion) by stepping up spending.
State and local governments have also been trying to tighten their budgets. Their expenditures this year will be less than in 1980. In the process, they have spent less on roads, subways, sewers, and other construction projects.
The federal government's new budget includes a small amount of extra money for urban renewal. But this, Dr. von Rosen concedes, is not likely to give the construction industry new life.
Nonetheless, most economists are expecting a moderate increase in output as the year advances. ``We are quite confident growth will go up,'' commented a Finance Ministry official in Bonn. He was especially encouraged by the stronger pace in business investment.
If that does not occur, the government will come under strong political pressures in the autumn to advance an 8 billion DM ($2.8 billion) tax cut scheduled for 1988 to the same time as 14 billion DM tax cut planned for the start of 1986. The goal would be to trim unemployment, which is just over 8 percent, high by German standards.
(Because of the size of the ``black economy,'' unemployment may not actually be so high. One estimate last week by a group associated with the ruling conservative political coalition held that 1.5 million people were involved in illegal employment. That compares with 2.1 million officially jobless.)
Earlier this month, those German politicians backing an extra tax cut got some support from the economists at the Organization for Economic Cooperation and Development (OECD) in Paris. In a report on the German economy, they recommended a further cut, noting that those already announced would ``only roughly offset the rise in the personal income tax burden since 1982, due to the progressivity of tax scales.''
The OECD economists also suggested further cuts in government subsidies, a goal of Chancellor Helmut Kohl but one he has done little about for political reasons. The cost of such subsidies rose 17 percent in 1984 over '83. Last month the government announced it would trim subsidies next year by 1 billion DM ($348 million) for such industries as shipbuilding, steel, and coal mining. This compares with total federal subsidies running somewhere around 40 billion DM.
Most economists expect the German economic expansion to continue in 1986. In fact, because the Bundesbank is committed to a policy of steady growth in the nation's money supply, some see a possibility for steady economic growth for some time to come.
``There is a pretty good chance this will occur in the next few years,'' said Dr. Alfred Boss, an economist with the Institute for the World Economy.