War fears 'hurting global economy'

europe.cnn.com Monday, February 17, 2003 Posted: 1206 GMT

Demonstrators in Berlin take part in global anti-war protest at the weekend

BERLIN, Germany (Reuters) -- Only an end to tensions over Iraq could counteract a downturn in the global economy whose recovery slowed noticeably towards the end of last year, Germany's central bank said on Monday.

The Bundesbank said Germany saw a slight contraction in gross domestic product in the fourth quarter of last year, but it did not expect a recession -- defined as two successive quarters of economic shrinkage -- as there were recovery signs.

The central bank warned in its February monthly report that a prolonged conflict in Iraq would lead to sharper falls in world growth.

"The global economic recovery slowed noticeably in the autumn of 2002; in the group of industrial nations it even stood still. There was little change in this picture at the end of the year,'' the Bundesbank said.

The prospect of a war in Iraq and disturbances in Venezuela had led to a significant rise in oil prices which, combined with lower stock prices, dragged down growth.

Economic gloom would lift only when confidence improved.

"Reducing geopolitical tensions is unavoidable in this.... A longer (Iraq) conflict would result in a continuation of a higher oil price and renewed global slowdown.''

"The recent rise in the value of the euro is less an expression of the economic strength of the euro zone, it is much more the result of negative factors hitting other currencies,'' the report said.

German economy almost stagnant

The Bundesbank said Germany, Europe's largest economy, was effectively treading water in the final months of last year and fourth-quarter GDP shrank very slightly versus the previous quarter.

"By our initial reckoning, real GDP in the fourth quarter of 2002, excluding seasonal and calendar effects, was somewhat lower than in the previous three months,'' it said.

Year-on-year, fourth-quarter GDP was up around 0.5 percent, according to Bundesbank calculations, in line with forecasts that average gross domestic product in 2002 rose by 0.2 percent.

However, some leading indicators were pointing to a gradual recovery in Germany and the Bundesbank did not expect Germany to slip into recession.

"Increasingly signs from surveys of firms and industrial orders allow hope that the German economy will bottom out in the early months of this year. This is particularly true of industry,'' the Bundesbank said.

Production in the final quarter of 2002 was particularly affected by holidays, while cold weather hit construction hard.

"The economy has been in a phase of quasi-stagnation for over two years now. Global slowdown contributed to this and, additionally, Germany is particularly intensively involved in international trade,'' it said.

The central bank said the current slowdown could not be explained solely by cyclical factors and reform was needed.

"Home-made reasons are coming to the fore more and more, such as labour market rigidity, high tax and social contributions or lack of incentive in the social security system,'' it said.

"Insecurity about economic policy has also hit basic sentiment in economy,'' it said.

The central bank said the government had taken the first steps to reform the labour market by introducing reforms, such as those of the Hartz Commission. "However, introducing these will take time.''

The head of Germany's respected Ifo economic research institute said separately on Monday that he saw little scope for German recovery in 2003 even if no war erupts over Iraq.

"I think we can no longer expect the much desired recovery in 2003, but only a sluggish and dragged out improvement -- in a best case scenario,'' Hans-Werner Sinn, head of the think tank told Italian daily La Stampa in an interview.

Ifo's key business sentiment indicator rose for the first time in eight months in January, but Sinn said when the report was released late last month that it would be premature to say Germany's economy had turned the corner.

When asked what Germany must do at this current time of risk, Sinn added his voice to calls for reforms.