*** PDF version is attached ***

Germany falls into recession
Q3 2001		Actual	UBSW fc	Market	Previous
% qoq, adjusted	-0.1		-0.1		-0.1		-0.0
% yoy, adjusted	0.4		0.4		0.4		0.6
% yoy, unadjusted	0.3		0.4		n/a		0.6

German GDP contracted for the second consecutive quarter and in 
contrast to Q2, this time, the decline did not get lost in the rounding 
of the quarterly growth rate. Hence, it is now indisputable that 
Germany is in recession. Due to the bleak outlook for Q4, it is also 
undisputed that it will fall even deeper into recession.

All components of final domestic demand dropped in Q3. Inventories 
experienced the greatest decline in the history of the pan-German 
national accounts data. Another surprise came in the form of the 
greatest trade surplus ever recorded.

This pattern is unsustainable and will be reversed in the quarters 
ahead. We forecast a 0.5% contraction in German GDP in the current 
quarter. However, there are also some bright spots for 2002, most 
importantly the outlook for an end of the inventory correction and 
lower inflation which will relive private households? disposable 
income. Therefore, we stick to our GDP forecast of 0.6% this year and 
0.9% in 2002 on average.


Most components of domestic demand were in line with expectations in 
the third quarter. Private consumption dropped 0.2% as disposable 
income fell marginally and households lifted their savings to a rate of 
10.5% from 10.2% in Q2. Equipment investment fell by 1.8% qoq after 
downwards-revised 3.2% contraction in the second quarter. As a slight 
surprise, construction investment was flat in Q3 rather than falling 
further. This was the first quarter since Q3 1999 in which demand in 
the sector did not decline.

The greatest surprise within domestic demand was a record EUR5.4bn fall 
in inventories which resulted in a negative contribution of 1.1%pts to 
annual GDP growth, the worst figure since 1993 Q1. However, it has to 
be seen against the background of a 1.1% qoq rise in exports and a 2.2% 
fall in imports both of which seem to at least partly reflect 
logistical problems after 11 September.

As far as the outlook is concerned, there is good and bad news, with 
the bad news more associated to the near term and the good news to the 
more distant future. The fall in the ifo index of business confidence 
suggests that equipment investment is likely to continue to fall in Q4 
and in the first half of next year. We also believe that private 
households will remain cautious in the Christmas season and increase 
savings, also taking the introduction of new private pension schemes 
next year into account. This would depress GDP growth in Q4 and the 
early parts of 2002. We also expect both the negative inventory and the 
positive net export contribution to growth to be reversed, but this 
should have no significant net effect. 

On the positive side, the ongoing decline in energy prices, which is 
likely to be accompanied by lower core inflation next year, is expected 
to boost real disposable income next year. In addition, at some stage, 
precautionary saving is likely to be reduced both of which argues for a 
consumption recovery, even in the absence of employment growth.

The substantial inventory contraction this year, which is expected to 
depress average 2001 GDP growth by 0.7%pts, would argue for a partial 
rebuilding in 2002, especially in the second half of the year which is 
likely to lift GDP growth then as well. All in all, the outlook is 
therefore for more and accelerating German GDP weakness around the turn 
of the year, but for recovery in the course of 2002 which is also 
expected to be supported by recovering demand from the US and other 
regions of the world which are experiencing greater policy stimulus 
than Germany and the euro area. Our average GDP forecast of 0.6% growth 
this year and 0.9% in 2002 remains in place. Our forecast for exit 
growth rates (GDP growth yoy in the fourth quarter) are ?0.3% for 2001 
and 2.4% for 2002 which highlights the momentum of the recovery implied 
by these average growth rates.

_______________________________________________
Holger Fahrinkrug
Senior Economist
UBS Warburg AG
Stephanstra?e 14-16, D-60313 Frankfurt, Germany
Tel. +49 69 1369 8280
Fax +49 69 1369 8221
Email: holger.fahrinkrug@ubsw.com