The Lehman 2.0 scenario

Take a deep breath and relax. The Lehman 2.0 scenario is most likely... not going to happen, according to Andreas Rees, chief German economist at UniCredit in Munich. He is also the keynote speaker at our upcoming 17th Annual Construction and Property Conference, where he will be discussing the challenges on the bumpy road to recovery. Talking about the euro debt crisis is the inescapable thing to do, but given the current consternation and pending policy responses in the short-term, any answers could easily be out of date before going to print. Instead we focused on another hot issue - is the German economy heading for an economic slowdown and how the challenges in front of the EU's largest economy are likely to effect the neighbouring CEE economies dependent upon it

Mladen Petrov, Eurobuild CEE: It's happening, isn't it? The German economy is slowing down.
Andreas Rees, chief German economist at UniCredit: There's no denying that a significant growth slowdown in the German economy is underway. This is the unambiguous message from forward-looking sentiment surveys of German companies. We expect GDP growth to slow down significantly from 3 pct this year to 11 pct in 2012. The German growth locomotive will lose steam after two exceptionally strong years.

How bad is this for Europe?
It goes without saying that this will be felt in other parts of Europe, both in the European Monetary Union and the CEE region. For the majority of European countries, Germany is the most important export market. However, at the same time I do not see any reason to become overly pessimistic and raise the white flag for the German economy. The backlog of orders for German companies is still very high by historical standards. This will be worked off in coming months, thereby acting as some kind of an airbag both for the German economy and the rest of Europe.

The German economy is particularly important for Poland and the Czech Republic, so any bad news coming out of Berlin would have deeper repercussions in the region...
The German market is indeed very important for Poland and the Czech Republic. Export shares to Germany are between 25 pct and 30 pct, thereby reflecting the "workbench" model of these economies. Intermediate goods have been imported by German companies from the CEE region, processed further and then shipped on again to other countries. This kind of goods exchange will lose momentum in coming months. However, the events after the collapse of Lehman Brothers in autumn 2008 showed that the Polish economy especially can be remarkably resilient, even when the German economy was hit hard.

Where do you stand on the second recession issue?
"I do not believe in a double-dip scenario, neither in Germany nor in the rest of Europe. It doesn't need to be said that there are risks. For instance, high risk aversion may spill over into the real estate sector, thereby deterring companies and consumers from investing and purchasing further. But I think these risks are still manageable. The most important issue now is to calm down the financial markets by finding a sustainable solution to the European debt crisis. As of today, the first steps are being taken in the form of the extended European Financial Stability Facility (EFSF), and further measures will certainly follow swiftly. Hence, Lehman 2.0 is not awaiting us, but rather a cyclical downswing with the first signs of recovery in the second half of 2012.

And what about the US? We were expecting the global recovery to come from there, but now a double-dip crisis is also a very possible scenario for this country.
I'm not sure whether the US is really heading for a double-dip, since substantial tax cuts are in the pipeline for next year. But undoubtedly, the economy is lacking a sustainable business model after the collapse on the residential property market. Strong growth impulses will therefore not be coming from the US in coming years but from emerging Asia and here, above all, from China. I expect this to be happening already in the course of 2012, when the negative impact from higher food prices and interest hikes in China fizzles out. Fortunately, the Chinese growth story with its huge pent-up demand is absolutely intact. This is good news both for Germany and the CEE region. In the meantime, China plus Hong Kong have become of similar importance for German exporters as the US. The CEE region will certainly benefit from this as well.

Andreas Rees is the keynote speaker of the 17th Annual Construction and Property Conference on December 8th at the Hilton Hotel in Warsaw, organised by Eurobuild Conferences.

Meet our keynote speaker
Andreas Rees is the chief German economist at UniCredit in Munich. He works in the macro research department, focusing on a wide range of business-cycle and economic policy related topics. Previously, his work involved analysing bond and FX markets and developed quantitative models for forecasting purposes at HypoVereinsbank. Andreas holds a master's degree and a PhD in economics.