Daimler forecast signals Germany's slip into recession

No company symbolises German industrial might like Daimler, the giant manufacturer of Mercedes-Benz cars and trucks. So when the company said this week that it had finally been caught in the downdraft of the European economic crisis, it was an ominous sign for all.

German exporters like Daimler have been bastions of stability on a continent burdened with shaky banks, dysfunctional governments and legions of unemployed youth - not to mention the worst vehicle industry slump in two decades.

But Daimler's glum forecast for this year was the latest evidence that Germany, and other relatively healthy countries like Austria and Finland, risk falling into the recession that has afflicted their southern neighbours.

The slowdown in Germany was foreshadowed by months of declining industrial output, said Carl Weinberg, chief economist of High Frequency Economics.

"The EU has made Europe a much more cohesive economy, which is good when things are going up," he said. "But when things are going down the multiplier is very strong. An outgoing tide lowers all ships."

The region's overall weakness, as well as slowing demand in China and other big markets for German exports, are finally taking their toll.

Just one more consecutive quarter of shrinking economic output and Germany will officially enter a recession. The same is true of Belgium, France, Luxembourg, Austria and even Sweden and Finland. The Netherlands has already had two quarters of declining gross domestic product.

Further evidence of the spreading European recession came on Thursday, first from Madrid, where the government reported that unemployment had reached a record 27.2 per cent. Then new economic data from London indicated Britain had barely avoided slipping back into recession for the third time since 2008.

"The reality is that Europe still faces severe vulnerabilities that, if unaddressed, could degenerate into a stagnation scenario," said David Lipton, first deputy managing director of the International Monetary Fund.

If Germany slips into recession, much would slide down with it. Germany and the other 26 countries of the European Union together represent the world's second-largest economy and make up the largest US trading partner. The further delay in Europe's recovery that a German recession would cause would seriously hamper growth in the US, Asia and Latin America.

What growth remains in the region is mostly from eastern Europe. Poland is protected by its large domestic market and a healthy banking system. After a severe downturn, growth is rebounding in Estonia, Lithuania and Latvia.

Those countries benefit by being low-wage economies, and they continue to attract capital. It also helps that because they do not use the euro, they can adjust their currency more easily to changing conditions.

In Germany, unemployment is 5.4 per cent compared with an average of 10.9 per cent in Europe. Nevertheless, polls show businesses are growing pessimistic. "The German market cannot decouple from this environment," Bodo Uebber, the Daimler chief financial officer, said.

The problem for the rest of Europe is that any hope for recovery is pinned on a robust German economy. Companies in Spain and Italy have depended on German demand to make up for a collapse in consumer spending in their own countries.

The only hope for Spain is to leave the euro — Opinion, Page 9