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Business

Opinion: No room for complacency

Germany's economic growth accelerated in the first quarter of 2014. At the same time, the main benchmark DAX index jumped to new record highs. But now is not the time for complacency, says DW's Henrik Böhme.

What a day! At eight in the morning, the latest figures on the country's economic performance in the previous quarter were released by the Federal Statistical Office (Destatis): 0.8 percent GDP growth in the first three months of the year.

With this pace of expansion, Europe's largest economy appears to be on the right track, particularly when compared to other countries in the region. A little more than an hour later came the next breaking news: Germany's main stock index, the DAX, rose to a record high of 9800 points for the first time. At first glance, they seemed to be good news.

However, both numbers have nothing much to do with each other. While statisticians measure past performance, stock markets react to expectations. Although 0.8 percent output expansion in the present global economic climate might have had an impact on the market movements, one needs to look at them more closely.

For starters, the extremely mild winter benefitted the German economy, as the construction industry – which has a significant share in the nation's GDP – avoided seasonal dips on account of bad weather.

On the geopolitical front, it is unclear how far the Ukraine crisis will escalate. Even now, when harsh sanctions have yet to be imposed, a number of German companies are complaining about their declining business in Russia.

Many experts are also of the opinion that the Russian economy is facing deep recession but they do not believe the conflict in Ukraine is to blame. Nevertheless, with such a decline in output, the country falls out of the pack of other emerging countries such as China, India and Brazil, even though they too are experiencing their own problems.

The poison cocktail has other ingredients too, such as the price decline in the euro zone. If across-the-board deflation were to prevail, the consequences would be disastrous. Anticipating further price drops, companies would halt their investments and people would stop purchasing, leading to a deflationary spiral that would stifle growth and bring even a well-functioning economy to its knees.

Then there is the issue of a strong euro. The common currency's exchange rate stands at $1.40 and the French prime minister has already urged European Central Bank (ECB) to intervene, resulting in the ECB president Mario Draghi letting out anxious tones.

The economy is also threatened by the enormous amount of money that has been spent by central banks for several years to bring an end to the crisis. Such growth in money supply has the potential to create bubbles that can cause great damage when they burst. The global financial crisis was triggered when the US housing bubble burst in 2007.

But the German government poses the greatest threat to this economic recovery and the current stock market highs. With strange policies - introducing minimum wages, an early retirement age and the lack of will to invest in education and infrastructure - it could unwittingly facilitate this good phase's end.

Yet Europe needs an economic engine, particularly as the growth rates of other European economies languish somewhere between modest and poor.

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