Germany’s Woes May Drag Down Its Neighbors : Economy: Despite optimism in the U.S., forecasters predict a German slump will hit many European nations.

A growing economic slump in Germany stands in the way of a stronger recovery in most European countries, a leading survey said.

The slide in Germany threatens to offset most of the benefits from a U.S. recovery for Europe’s moribund economies, Oxford Economic Forecasting said in its regular winter review.

More positively, though, Germany’s largest trading partners can still look forward to “substantial cuts in German interest rates during the year,” the forecasters said.

Elsewhere in the industrialized world, Japanese growth is predicted to rise by 2.4% this year from 1.5% in 1992.

Yet “for most European countries, the good news emerging from the U.S. is more than canceled out by the increasingly moribund state of the German economy,” the British think tank said. Countries closely tied to Germany, such as Switzerland, Austria, Belgium, Holland and Luxembourg, will be hit especially hard.

German output is forecast to shrink by 0.5% this year, with the former West Germany alone contracting 1.1%. By contrast, U.S. growth will accelerate to 3%, from 2% last year and a 1.2% drop in 1991.

For the industrial world as a whole, the research group forecasts 2% growth in 1993, up from 1.5% last year and a scant 0.8% in 1991, but still below the 2.5% level reached in 1990.

World recovery would be stronger except for the slowdown in Germany, Europe’s largest economy. The downturn is especially dramatic compared to Germany’s strong 5% growth in 1990, which slowed to 3.6% in 1991 and 0.5% in 1992.

What’s worse, the causes of Germany’s decline are hard to address. “The principal problem is intangible,” the institute said. “Over the past year, the confidence levels of both businesses and households have plummeted” because of social unrest arising from German reunification, high interest rates and political lethargy.

Almost every economic indicator in Germany points downward, the Oxford group said. A leading business climate indicator shows business confidence lower than at any time since the last recession in 1982. Orders to mechanical engineers are off by an annual rate of 17%. Exporters have been hurt by last year’s rise in the deutsche mark, 4% domestic inflation and devaluations in Britain, Italy and Spain.

All of which points to the Bundesbank, Germany’s central bank, finally giving in to easier credit, Oxford said. Three-month rates are forecast to drop below 7% by the end of the year. The Lombard rate is now 9.5%. But lower interest rates depend on the Bundesbank seeing a proposed “solidarity pact” between labor unions and employers and some sort of budget agreement to rein in galloping government spending.

And any cuts in German credit policy “will feed immediately through” to its partners in the currency grid known as the European exchange rate mechanism.

Meanwhile, countries such as Spain and Italy--whose trading links with Germany are relatively smaller and who are highly sensitive to interest rate moves--can offset the effect of lower exports to Germany with easier credit themselves.

As far as Britain is concerned, lower interest rates in mainland Europe are too little too late. Since the Oxford forecasters don’t expect Britain to trim rates below the current 7%, “the full effect of Germany’s slump will be felt through (lower) exports.”

Whereas Britain had been forecast in October to see economic growth this year of 1.9%, the forecasting group now expects output to grow by 0.7% this year, up from a 1% drop last year. Next year, however, growth is expected to be 2.9%, up slightly from a 2.8% forecast in October.

On the inflation front, German prices are forecast to expand by 3.6% this year, down slightly from 3.9% last year. Inflation is also expected to slow in Japan, to 1.5% from 1.9%; in France, to 2.3% from 2.7%, and in Britain, to 2.6% from 3.6%.

In the United States and Italy, inflation is set to grow. U.S. prices are estimated to rise by 3.5% this year from 3% last year, while Italy’s expand by 6.5% from 5.4%.

Japan’s giant balance of payments surplus is expected to stay mostly unchanged this year, growing by $1 billion to $117.6 billion. The U.S. deficit also stays static, deteriorating by $1.7 billion to $54.8 billion.