An environment like this should really be more than made for spreading optimism. Yet an upbeat mood simply refuses to materialize, not only in Germany. In practically all industrialized countries, further progress on financial consolidation is perceived as a top-priority corporate objective. And indeed, following a period of heavy deficit financing in the second half of the 1990s that strongly lifted the ratio of debt levels to gross domestic product in the non-financial corporate sector for most industrial countries, from a business management angle this would appear a logical correction. In macroeconomic terms, though, the flipside is only muted growth in machinery and equipment investment and little momentum on the labor market. In a whole raft of countries, economic expansion is thus relying disproportionately on the household sector, in both its consumer and home-buyer capacity. This applies in equal measure to the US, the UK and France.
Germany: Economic forecast 2005
The consequence is unusual financing constellations, such as a savings gap (the difference between gross savings and gross investment expenditure) of –3 % of GDP at US households, while non-financial corporations have an almost squared financial balance. Households and companies appear to have switched their traditional roles as lender and borrower. Germany, where the economic rebound has been based solely on exports so far, occupies a special position in the concert of industrial countries.
This global economic disequilibrium is exacerbated by the oil price, which has obstinately stayed atop the USD 40/barrel (Brent) mark for some months. The US flow of funds statistics, for instance, show a marked deterioration in the financial situation of all private sectors, even though spending momentum has been curbed. Whereas in the euro area and Japan upward price pressures on the oil market in 2003 were largely compensated by the dollar devaluation, that has ceased to be the case with oil price increases this year. As a rule, there is also a time lag of two to three quarters before the drain on purchasing power caused by soaring oil prices works through to real spending decisions by private-sector economic agents. Consequently, even a drop in oil prices by the end of this year would be very unlikely to prevent a slowdown in economic activity for 2005.