The Guardian

Brussels, January 5:

France and Germany, the two biggest economies in the eurozone and accounting for half its output, are almost certain to undershoot their growth targets again in 2005 as unemployment and poor consumer spending continue to depress their potential. In Germany the headline jobless total last month soared close to 4.5 million, according to figures out yesterday, making 2004 the worst year for unemployment since unification in 1990. The prospect is for a total of five million to be reached as early as this month. In France INSEE, the national statistics office, revised its gross domestic product (GDP) estimate from 0.1 per cent growth to zero for the third quarter of 2004 after a steeper than expected decline in personal consumption.

The only relief on the horizon came with a one per cent decline in the euro’s value against the American dollar after the single currency’s rise threatened to further depress growth prospects in both countries. The spurt in the German jobless numbers, coinciding with new labour market reforms — which could add at least 300,000 to the figure — topped 200,000 in December and took the total to 4.48 million.

Engineering group Thyssen-Krupp added to the gloom by announcing plans to cut 800 jobs at its shipbuilding business. Opel, the domestic arm of General Motors, is already planning to reduce its workforce by 10,000 at plants across the country.

Wolfgang Clement, the economics minister, has asserted that German growth this year will be 1.7 per cent and the DIW, one of the country’s six leading economic institutes, confirmed his optimism by forecasting it would be 1.8 per cent this year and two per cent in 2006 as consumer spending improves. The other five are predicting at best growth of 1.3 per cent, with one forecasting 0.8 per cent. The DIW also suggested unemployment would fall to 4 million next year while the budget deficit would draw near to the three per cent ceiling stipulated by the EU’s stability and growth pact. On the jobless rate, Clement said, “I don’t expect a strong and lasting turnaround until 2006.” A worry for policymakers is that despite strong sales over the Christmas period, consumer spending in a country beset by deep-rooted anxiety is likely to remain poor this year — a growing problem also in France where it had, until the second half of last year, buoyed the overall economy.

Yesterday’s revised INSEE figures showed consumer spending dropped in the third quarter of 2004 by 0.2 per cent, with Nicholas Claquin, an economist at CCF, telling Reuters that unemployment, at close to 10 per cent, was weighing down on consumption. “We will see a bit of a rebound in the fourth quarter but the trend for 2005 is a slowdown.’’

INSEE insisted growth would be 2.1 per cent — below the 2.5 per cent forecast by the government of president Jacques Chirac, who has promised a return to tax cuts and reduced state spending.