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Summary of the Joint Economic Forecast Autumn 2008
14 October 2008, 1/6
Members of the Joint Economic Forecast Group
Germany on the Brink of Recession
Summary of the Joint Economic Forecast Autumn 2008
14 October 2008
The world economy is in a downturn phase in autumn 2008. Various factors have
contributed to the downswing: the world-wide boost in inflation from commodity
prices, the corrections in the real-estate markets of an increasing number of countries as
well as the worldwide financial market crisis. The recent dramatic sharpening of this
crisis has worsened the outlook for economic activity.
In a number of industrialised countries the economy could slip into recession. In the US
many indicators point to very weak basic economic activity; in Western Europe the
leading indicators have fallen drastically in recent months and economic output is no
longer expanding; in Japan demand has plummeted. Only in the emerging economies
has production still been expanding quite strongly, although the speed of expansion has
also abated here too, on the whole.
World economic activity will continue to lose momentum, since the strains, especially
from the financial and real-estate markets, are considerable at the moment. In some
countries, especially those in which the financial and construction sectors have great
importance, a recession threatens. But also in those countries in which the expansion
was borne to a large extent by exports, the downturn will be distinct.
If, as this forecast assumes, the banking sector is stabilised, world economic activity
should gradually recover from mid-year 2009. Then, some favourable factors will
gradually come to the fore. Inflation will be reduced worldwide in the coming months
by the recent price corrections in the international commodity markets. Since declining
prices for energy sources will have an immediate easing effect, household purchasing
power will be strengthened. Another favourable factor is the relatively robust condition
of balance sheets of many enterprises outside the financial sector. The world economy
Summary of the Joint Economic Forecast Autumn 2008
14 October 2008, 2/6
continues to be supported by the strong demand from the emerging economies, whose
economic weight has continued to increase strongly in recent years. Although here too
the rate of production increase has decreased, the growth in demand remains
considerable, all in all.
The forecast’s greatest risk factor consists in the extent and duration of the crisis on the
international financial markets. Modern economies are dependent on an efficient
circulation of savings via the financial markets for use in the real economy. The
financial markets will only be able to fill this role sufficiently if – as the Institutes’
assume in this forecast – a gradual stabilisation of the banking sector occurs in the
coming months. Otherwise investment activity in the real economy could decline
sharply and the critical situation in the US and European banking systems would affect
other national economies with hitherto stable financial systems via the international
economic linkages.
The German economy is on the brink of recession in autumn 2008. Numerous negative
external shocks had already caused a cooling in the cyclical climate, and with the sharp
worsening of the situation on the financial markets the outlook has clearly deteriorated.
Germany is particularly affected by the weakening in international economic activity
because especially the demand for capital goods, which plays an overriding role in
German exports, is declining. Also the worldwide slowing of economic activity hits a
German economy whose price competitiveness has been deteriorating for almost two
years because of the strong euro. Finally, the massive increase of world market prices
for energy, raw materials and food have worsened the terms of trade, and this has
primarily affected consumers. Price increases have accelerated perceptibly and with this
real incomes have declined, although nominal incomes have increased quite clearly;
private consumer spending has fallen in real terms.
Leading economic indicators point to declines in production in the coming months. In
particular, the expectations of businesses in almost all sectors of the economy have
deteriorated to an extent only observed when an economy is already in recession. The
Summary of the Joint Economic Forecast Autumn 2008
14 October 2008, 3/6
Institutes forecast that GDP in the second half of this year will decline at an annualised
rate of 0.7%. For 2008 as a whole, however, GDP will expand by 1.8%.
In order to take the enhanced insecurity for the coming year into account sufficiently,
the Institutes have calculated, along with a by-no-means optimistic basic forecast, also a
risk scenario. In their basic scenario they forecast that aggregate economic output will
gradually recover after the turn of the year. This is supported by the clearly more
favourable starting position, in comparison with former downturns, of the enterprises
outside of the financial sector. They have consolidated their balance sheets in recent
years and have gained in competitiveness also as a result of labour market reforms. The
robust employment situation also argues against a fall in disposable incomes. Finally the
structure of the finance sector in Germany, with the relatively high importance of
traditional bank business, could prevent the international banking crisis from affecting
economic activity as strongly as in other countries.
Private consumer spending will have a supporting effect in the forecast period.
Disposable income will expand quite strongly, even as the situation on the labour
market worsens, since employment will fall only marginally and some wages will
increase and because transfer incomes will rise more strongly especially since pensions
lag behind wage development. Since inflation will decline, real income should increase
albeit marginally. Investment activity will remain restricted initially as capacity
utilisation falls, financing costs rise and above all because of unfavourable sales and
profit expectations. Not until during the course of 2009 will businesses slightly increase
their investment budgets. Here, a loosening of monetary policy will play a role. With
the gradual stabilisation of the world economy expected by the Institutes in the second
half of the coming year, exports will expand especially since price competitiveness will
have improved somewhat in particular due to the recent weakening of the euro. All in
all, this basis scenario for 2009 forecasts an increase in GDP of a mere 0.2%.
Declining capacity utilisation will have an increasing effect on the labour market in the
coming months. Employment will increase slightly up to the turn of the year and only
decline in the course of 2009; at the end of 2009 there will be 350,000 fewer employed
Summary of the Joint Economic Forecast Autumn 2008
14 October 2008, 4/6
than at the beginning of the year. The number of registered unemployed will not rise
exactly in parallel since the employee potential will fall slightly due to demographic
reasons and since some that lose their jobs will probably move into hidden
unemployment (Table 4.2 key data).
In the risk scenario, economic activity will decrease more strongly and longer in the
coming year than in the basis scenario. The risk scenario assumes that the world
economy will fall into recession, financing costs will clearly increase due to the
financial market crisis, and the insecurity of private households will cause more
restraint in their consumption. In this case, Germany would fall into a marked recession,
as was the case after the oil-price shocks in the 1970s and at the beginning of the 1980s.
GDP would fall by 0.8% on average for the year. Investments in plant and equipment
would decline particularly strongly, as has been observed in former recessions. The
situation on the labour market would clearly deteriorate. The unemployment rate in
2009 would increase to 8.3%, and almost 400,000 jobs would disappear. The Institutes
consider this scenario to be less probable than the basic forecast. But the risk that the
more unfavourable development will occur has clearly increased in recent weeks.
Experience from earlier crises confirms that the raising of equity is possibly hindered
and that for this reason the resolute intervention of the state is required. The top priority
must be to rapidly re-capitalise the entire banking system. However, such a governmentinitiated re-capitalisation should be done in such a way that the associated false
incentives and inefficiencies are kept to a minimum. To ward off the dangers that stem
from recent developments on the financial markets, the state should provide capital in
the form of investment participation. It would be advantageous here if the issue of
shares to the state were combined with the emission of new shares on the capital market.
Policy-makers are currently correctly concentrating on averting the dangers for the
stability of the financial system. The task is extremely difficult: on the one hand, a
systemic crisis must be prevented. Here, policy must not concentrate on the rescue of
weak banks but should strive for a systemic solution. On the other hand, it should
ensure that the burden on taxpayers does not become too great. Part of an overall
Joint Economic Forecast Autumn 2008 (14 Oct 2008)
Federal Republic of Germany
Key Forecast Figures
2006
Percentage change over previous year
Private consumption
Government consumption
Gross fixed capital formation
Machinery and equipment,
Buildings
Other investment
Domestic demand
Exports of goods and services
Imports of goods and services
Gross domestic product (GDP)
West Germany and Berlin
East Germany
Employment (1.000 persons)
West Germany and Berlin
East Germany
Unemployment (1.000 persons)
West Germany and Berlin
East Germany
Unemployment ratec) (in %)
West Germany and Berlin
East Germany
2007
2008
2009
(a)
(a)
b)
1,0
0,6
7,7
11,1
5,0
8,0
2,1
12,7
11,9
3,0
3,0
2,2
-0,4
2,2
4,3
6,9
1,8
8,0
1,1
7,5
5,0
2,5
2,5
2,2
-0,4
2,0
3,8
4,8
2,9
5,2
1,1
4,4
3,4
1,8
1,8
1,3
0,4
2,0
-1,4
-3,0
-0,6
2,9
0,2
0,3
0,4
0,2
0,2
0,0
39024
32989
6035
4487
3300
1187
39694
33569
6125
3776
2747
1030
40238
34058
6180
3263
2333
930
40157
33997
6160
3263
2328
935
10,3
9,1
16,4
8,7
7,6
14,4
7,5
6,4
13,1
7,5
6,4
13,2
1,6
2,3
2,8
2,3
-1,2
0,4
1,6
2,3
-35,9
3,1
3,8
0,4
-1,5
0,1
0,2
0,0
2,8
2,0
1,6
1,0
2,4
2,0
0,8
0,8
2,9
2,6
1,1
0,2
2,2
2,1
3,5
2,6
Consumer pricesd)
(% change on the previous year)
Unit wage costs)
e)
(% change on the previous year)
f)
General government financial balance
- EUR billion
- in % of GDP
memo item:
USA: Real GDP
(% change on the previous year)
Japan: Real GDP
(% change on the previous year)
Real GDP in the EMU
(% change on the previous year)
Consumer prices in the EMU
(% change on the previous year)
g)
a) Forecast by the Institutes.- a) Price-adjusted.c) Unemployment as a % of labour force (employed and unemployed).d) Consumer price index.- e) Gross wages and salary income
created in the domestic economy per employee as a % of GDP (price-adjusted) per employed
person.- f) On national accounts definition (ESA 1995).- g) Harmonized index of consumer prices (HICP-EMU).
Quelle: BEA, ESRI, Eurostat, Federal Statistical Office, AK VGR der Länder, Federal Agency of Labor,
Forecast by the Institutes.
Summary of the Joint Economic Forecast Autumn 2008
14 October 2008, 5/6
concept would thus include state participation in the profits that arise from the
overcoming of the crisis.
In the current situation it is helpful that the financial condition of the state has
considerably improved in recent years. It is thus possible and reasonable to let the
automatic stabilizers in fiscal policy take their effect. In this respect Germany is in a
more comfortable position financially than other large countries in the EU that are also
on the brink of recession.
In the course of the weakening of economic activity, the situation of the public budgets,
which have been almost balanced up to now, will weaken. This is in itself no cause for
taking measures to avoid a deficit since of key importance for assessing the financial
situation is the structural (business-cycle adjusted) budget balance. The burdens
resulting from the banking crisis should also not be the occasion for pursuing a
restrictive fiscal-policy course, because this is a one-off effect. The question is whether
fiscal policy should take measures to stabilise economic activity.
The Institutes are convinced that economic activity programmes in the traditional sense
have little chance of success. It is conceivable, however, that the state rapidly
implements measures that are reasonable for the stabilization of the growth forces in the
medium term or that are unavoidable for legal reasons. To be sure, the economic effects
of such policies are limited but the long-term effects are to be viewed positively.
Policy-makers could act both on the revenue and on the expenditure sides. A reduction
in the income tax burden is a possibility; also a lowering of social insurance
contributions can be implemented rapidly and would be good employment policy. On
the expenditure side, policy could consider carrying forward already planned and
growth-stimulating investments in education, research and infrastructure. This does not
mean that the consolidation course should be fundamentally abandoned. For this reason,
with the lowering of social insurance contributions and the additional spending, it
should simultaneously be made clear how the subsequent financing of these measures is
to occur so that a permanently higher state indebtedness does not occur. For example,
Summary of the Joint Economic Forecast Autumn 2008
14 October 2008, 6/6
the decision should be made to reduce subsidies as of 2010 more strongly than now
planned or to closely limit the rise of consumptive spending. This would ensure that the
consolidation course is maintained in the medium term.
The European Central Bank has reacted to the financial market crisis by altering its
liquidity policy and after the recent escalation of the crisis has lowered interest rates;
this will limit the economic downturn. In the forecast period further reductions in
interest rates can be expected. However, the ECB should ensure that, after the price
increases of recent years, the medium-term inflation expectations are anchored to its
implicit inflation goals. Specific aspects of the recent massive worldwide price increases
for raw materials, energy and foods are treated in a special chapter of the forecast.
Members of the Joint Economic Forecast project group:
•
Ifo Institute for Economic Research at the University of Munich
[www.ifo.de]
in co-operation with:
Swiss Institute of Business Cycle Research (KOF), ETH Zurich
[www.kof.ethz.ch]
•
Kiel Institute for the World Economy [www.ifw-kiel.de]
•
Halle Institute for Economic Research (IWH) [www.iwh-halle.de]
in co-operation with:
Macroeconomic Policy Institute (IMK), Hans Böckler Foundation [www.imkboeckler.de]
Austrian Institute of Economic Research (WIFO) [www.wifo.ac.at]
•
RWI Essen [www.rwi-essen.de]
for the medium-term forecast in co-operation with:
Institute for Advanced Studies, Vienna [www.ihs.ac.at]