German may flirt with recession early next year

Updated 08 December 2012
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German may flirt with recession early next year

FRANKFURT: The German economy, Europe's biggest, will not be able to escape the crisis and may even flirt briefly with recession early next year, but is well placed to rebound strongly, the Bundesbank said yesterday.
The German central bank, in its latest updated twice-yearly forecasts, said there were "indications that economic activity may actually fall in the final quarter of 2012 and the first quarter of 2013."
Recession is technically defined as two consecutive quarters of negative growth and many of Germany's euro zone neighbors have been pushed into recession, in some cases deep, by the region's long-running debt crisis.
Although Germany has managed to hold up to the crisis fairly well, growth has slowed here as well since the beginning of the year.
After expanding by 0.5 percent in the first quarter of 2012, gross domestic product (GDP) grew by just 0.3 percent in the second quarter and a mere 0.2 percent in the third quarter.
"The cyclical outlook for the German economy has dimmed," the Bundesbank wrote in its December monthly report.
"However, there are sound reasons to believe that Germany will soon return to a growth path. The sound underlying health of the German economy suggests that it will overcome the temporary lull without major damage to the labor market, in particular," it said.
Government spokesman Steffen Seibert, quizzed about the Bundesbank forecasts at a regular news briefing in Berlin, said "it is no secret that we're in a phase of economic cooling.
"But we have no doubt that the economy is still in growth mode," he added.
"There are a whole range of indicators which in no way point to recession. The government remains cautiously optimistic."
Taking this year and next year as a whole, GDP would expand by 0.7 percent in 2012 and then by just 0.4 percent in 2013, the Bundesbank predicted.
That represents a marked downward revision from the central bank's previous forecasts in June, when it had been penciling in growth of 1.0 percent for 2012 and 1.6 percent for 2013.
It also gave its first estimation for growth in 2014, when the economy is forecast to expand by 1.9 percent.

The Bundesbank cautioned that its projections were "characterized by a high degree of uncertainty.
"It is quite conceivable that the euro area will recover sooner and the world economy will accelerate faster than assumed in this projection," it said.
"Downside risks nonetheless predominate," it added.
"Should global economic growth remain below expectations or the sovereign debt crisis escalate further in some countries, it is probable that the German economy may follow a weaker course than the one assumed in the baseline scenario," it said.
The day before, the European Central Bank unveiled its own set of — rather gloomy — economic forecasts for all 17 countries that share the euro.
In its regular quarterly staff economic projections, the ECB forecast that the euro zone economy will contract both this year and next year and only return to growth in 2014.
ECB chief Mario Draghi argued that the central bank's policy of low interest rates — it held them at their historical low of 0.75 percent on Thursday — would help fuel recovery.
The Bundesbank, too, believed the "exceptionally favorable financing conditions" would benefit businesses' investment plans.
Turning to unemployment, the Bundesbank said it expected the labor market to "come through the economic slowdown in good shape."
The jobless rate, projected to reach a low of 6.8 percent this year, would edge up to 7.2 percent in 2013 and then fall back to 7.0 percent in 2014, it said.
Inflation, too, would remain contained, easing from an anticipated 2.1 percent year this to 1.5 percent next year and 1.6 percent in the following year.
The ECB defines price stability as inflation rates just below 2.0 percent.


World Bank shareholders approve $13 billion capital increase

Updated 2 min 41 sec ago
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World Bank shareholders approve $13 billion capital increase

QUOTE: “World Bank Group bureaucrats don’t often jump around and high-five and hug each other,” World Bank President Jim Yong Kim

FAST FACT: The last increase to the World Bank’s capital — worth $5 billion — occurred in 2010


World Bank shareholders approved a “historic” increase in the bank’s lending capacity late on Saturday after the United States backed a reform package that curbs loans and charges more for higher income countries like China.
World Bank President Jim Yong Kim said neither China nor any middle income countries was happy about the prospect of paying more for loans, but they agreed because of the overall increase in funds available.
The agreement, which also increase shares and voting power to large emerging market countries like China, was “a tremendous vote of confidence” in the institution that came after three years of tough negotiations, Kim said.
“World Bank Group bureaucrats don’t often jump around and high-five and hug each other,” Kim told a small group of reporters following the Spring meeting.
He said the increase was needed because even with the end of the global financial crisis, the bank has been called on to provide funding to address a new series of challenges facing poor countries, like climate change, refugees, pandemics, “all new things for us.”
The increase provides an additional $13 billion in “paid in” capital: $7.5 billion to the main institution and $5.5 billion to the bank’s private financing arm, the International Finance Corporation.
Kim said the increase will allow the bank to ramp up lending to an average of $100 billion a year through 2030, from $60 billion in 2017 and an expected $80 billion in 2018.
Countries will have five years to provide the funds, but can ask for a three-year extension. The last increase occurred in 2010 and added $5 billion to the bank’s capital and $200 million for the IFC.


The United States, the institution’s biggest shareholder, rejected the World Bank request in October and the administration of US President Donald Trump has argued that multilateral lending institutions should graduate countries that have grown enough to finance their own development, like China.
But US Treasury Secretary Steven Mnuchin on Saturday said Washington supports the increase because of the reforms to lending rules.
“I look at this as a package transaction... we support a capital increase on the World Bank, along with the associated reforms that they’re talking about making,” Mnuchin told reporters.
The increase requires legislative approval, but Mnuchin said he was hopeful Congress would back the plan. Kim also said he has had contact with representatives from both parties and received strong support.
In a statement to the World Bank’s governing committee, Mnuchin applauded the plan to “significantly shift lending to poorer clients.”
While he did not mention China by name, Mnuchin applauded the shift to a “new income-based lending allocation target and the re-introduction of differentiated pricing” for loans — meaning wealthier countries would pay higher interest rates.
“The latter will incentivize better-off, more creditworthy borrowers to seek market financing to meet their needs for development,” he said.
Mnuchin said the new arrangement, including for the IFC, “frees resources for countries that don’t have sustainable access to private capital markets.”P

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China’s Vice Finance Minister Zhu Guangyao said Beijing supported increasing World Bank resources but had reservations about the agreement for changes in lending policies.
“We are concerned about some of the policy commitments in the capital package, such as those on graduation, maturity premium increase for loans and differentiated loan pricing based on national income per capita,” he said in a statement.
“We hope that the management take different national circumstances into full account in the implementation of the graduation policies... to ensure that these policies will not impede cooperation between the (bank) and upper middle income countries.”
Kim acknowledged that lending to China would decline, but only gradually. That means “whatever borrowing they do has to be as impactful as possible.”
And he noted that because of the capital increase, “we will be able to maintain volumes for middle income countries as a whole.”
Zhu said the capital increase is “a concrete measure to support multilateralism” at a time when “anti-globalization sentiments, unilateralism, protectionism in trade” were creating uncertainties in the global economy.