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Summary of the Joint Economic Forecast in Spring 2009 (23 April 2009)
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Members of the Joint Economic Forecast Group*
In the Maelstrom of World Recession
Summary of the Joint Economic Forecast in Spring 2009
23 April 2009
In spring 2009 the world economy is in the deepest recession since the Great
Depression. The downturn intensified in the autumn into an utter collapse that
rapidly affected almost all countries of the world. Extensive governmental
programmes for the support of the financial sector and for reviving the economy have
not been able to restore confidence in future economic developments.
Indications of a cooling of world economic activity were already evident in 2007. At
the beginning of last year, the economic weakening was still largely limited to the US.
Thereafter, the downturn began also in the other industrialised countries. The
dramatic sharpening of the situation on the financial markets in September 2008 that
culminated in the bankruptcy of the investment bank Lehman Brothers touched off a
drastic downturn in output that also affected the newly industrialised countries, which
until then had quite robust economies. The intensity of the downturn in the winter half
year 2008/09 is also because output declined almost everywhere in the world
simultaneously. Among the industrialised countries, especially Japan and Germany
were hard hit – economies with a high export dependency.
Clear indications of an end of the downturn are still not evident even if some
indicators suggest that the decline in output and demand will slow in the coming
months. According to the members of the forecast group, the downward movement
will not bottom out until the winter half year 2009/2010. The subsequent economic
recovery will have little dynamism at the start. A key problem remains the continuing
uncertainty in the financial markets that is based particularly on solvency of individual
banks and that has slowed money flows perceptibly in the economy. This forecast
assumes that the situation in the financial markets will remain unstable for a time but
that another dramatic worsening of the situation will not occur. Some important
countries will also have a real-estate depression whose end is not yet foreseeable
and which will increase the write-off requirements of the banks. According to past
experience, recessions that are accompanied by real-estate and bank crises are
Summary of the Joint Economic Forecast in Spring 2009 (23 April 2009)
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deeper and more difficult to overcome than recessions in which such problems are
not prominent.
All in all, the forecast group expects that output in the industrialised countries will
decline drastically by 4.2 percent 2009 with a slight decline following in 2010.
Unemployment will increase massively, and the output gap will be considerable at
the end of the forecast period. This might result in a falling inflation trend. On the
whole, the economies of the newly industrialised countries will only shrink slightly in
2009. This, however, is above all the result of the continuing albeit weaker expansion
in the two large economies of China and India. In the remaining newly industrialised
countries in Asia and Latin America as well as in Russia, GDP will clearly decline. For
2010 a moderate recovery of economic activity is expected in most countries. World
output is expected to fall strongly in 2009. The development of world trade is even
more dramatic for which a decline of 15 percent is expected. In the coming year
global GDP might increase again slightly. In a historical comparison, however, the
rate of ca. 0.5 percent is very low, and also world trade will increase very hesitantly at
the start.
In spring 2009 the German economy is in the deepest recession since the foundation
of the Federal Republic. As a result of the worsening of the international financial
crisis last autumn, the global downturn intensified dramatically. Worldwide demand
for capital goods collapsed, and this affected the export industry, the driving force
behind the last upswing in Germany, extremely hard. Since German industry has
specialised in investment goods and consumer durables, it profited overproportionally from the economic expansion of its trading partners. Now, however, it
has been particularly affected because demand for these products has decreased to
a very large extent in the course of the world recession.
In the meantime the crisis has spread to the whole German economy. On the basis of
the present indicators the forecast group expect that the downward dynamic will
weaken but they see no stabilisation before mid-2010.
Already in 2008 total output shrank – after an unusually good initial quarter – at an
increasing pace, with the braking forces from exports becoming more and more
apparent after mid-year. After a declining trend in foreign orders for German industry
already in the first half of the year, from September on they plunged downward. As a
result production in manufacturing collapsed. In the first two months of 2009 the
Summary of the Joint Economic Forecast in Spring 2009 (23 April 2009)
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downward movement became even stronger. Both the speed and the extent of the
decline are unprecedented in the history of the Federal Republic.
For the first quarter of 2009 leading indicators confirm that the decline in economic
output accelerated. Incoming orders and production in manufacturing declined again
dramatically in the first two months and the business situation in trade and industry
received increasingly poorer assessments.
In the coming months the difficult world economic environment and the leading
indicators point to a continuing decline in production activity. To be sure, the
dynamics of the decline may have weakened; the decline in orders slowed somewhat
in February and the Ifo business expectations have improved slightly since
December 2008. Nevertheless, the basic economic tendency is still pointed
downwards. As a result of the continuingly desolate foreign order situation, a further
decline of exports is expected. Corporate investments will also be reduced further.
However, construction investments should increase as the public investment
programmes begin to take effect. It is also expected that private consumption will
provide initial support. With the increasing job-loss risk, however, the propensity to
consume will weaken so that private consumption will clearly decline by the end of
2009. All in all, GDP is expected to decline by 6 percent in 2009.
This should lead to an accelerated decline in employment. To be sure, the use of
shorter working hours will cushion the decline in employment initially, but firms will be
increasingly forced to reduce personnel levels the longer their capacities are
underutilised. In the course of 2009 a loss of more than 1 million jobs is expected. In
parallel, unemployment will accelerate, surpassing the 4 million mark in the autumn.
For 2010 the forecast group does not expect a dramatic recovery. GDP should
decline by 0.5 percent. By the end of the year, unemployment should stand at slightly
under 5 million.
The trend in consumer prices is regressive. The reduced prices for crude oil will
continue to have a lowering effect on prices for natural gas and electricity. Moreover,
the desolate demand situation and the underutilised capacities will put pressure on
core inflation. Since these adjustment processes will only take place gradually,
however, a slight increase in consumer prices of 0.4 percent is still expected for
2009. In 2010 they will stagnate on the whole.
Joint Economic Forecast Spring 2009 (23 Apr 2009)
Federal Republic of Germany
Key Forecast Figures
2007
2008
2009
2010
(a)
(a)
Percentage change over previous yearb)
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)
-0,4
2,2
4,3
6,9
1,8
8,0
1,1
7,5
5,0
2,5
2,5
2,5
-0,1
2,0
4,4
5,9
3,0
6,6
1,7
2,7
4,0
1,3
1,3
1,1
0,3
2,3
-8,7
-16,4
-3,9
2,0
-0,8
-22,6
-13,3
-6,0
-6
-5
-1,2
2,0
0,4
-2,1
1,9
2,0
-0,7
2,4
1,9
-0,5
- 1/2
-1
39768
3776
40330
3268
39822
3718
38702
4688
8,7
7,5
8,6
10,8
2,3
2,6
0,4
0,0
0,4
2,1
2,8
-1,3
- EUR billion
-4,2
-3,3
-89,2
-132,5
- in % of GDP
-0,2
-0,1
-3,7
-5,5
2,0
1,1
-3,5
-0,1
2,4
-0,7
-6,7
0,2
2,6
0,8
-4,5
-0,6
2,1
3,3
-0,1
-0,2
West Germany and Berlin
East Germany
Domestic employment (1.000 persons)
Unemployment (1.000 persons)
Unemployment ratec) (in %)
d)
Consumer prices
(% change on the previous year)
e)
Unit wage costs)
(% change on the previous year)
General government financial balancef)
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)
g)
Consumer prices in the EMU
(% change on the previous year)
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 in Spring 2009 (23 April 2009)
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The economic stimulus programmes, the declines in tax revenues as well as rising
labour-market expenditures will be a considerable burden for public budgets. For
2009 the financing deficit will shoot up to 89 billion euros, which corresponds to a
deficit ratio of 3.7 percent. Due to further declines in output and increasing
unemployment, the forecast group expects a deficit for the coming year of 133 billion
euros and a deficit ratio of 5.5 percent.
This forecast is above all based on the assumption of very slow recovery of the
international banking system as governmental rescue measures gradually take
effect. But this assumption carries high risks. The global banking system continues to
struggle with enormous balance-sheet risks and equity problems that could be
exacerbated by the recession and the increase in company insolvencies. For this
reason another crisis of confidence cannot be ruled out. The result could be a repeat
decline in orders and output. Then a slide into a worldwide deflationary downward
spiral would not be unlikely.
Upward forecasts risks also exist, however, since it is quite possible that the German
economy will recover faster than predicted. If the international banking crisis was
resolved rapidly and bank lending soon returned to normal, expansive monetary
policies could take full effect. In Germany the rise in unemployment could be
considerably slowed because with better sales outlooks firms would tend to avoid
dismissals.
In a medium-term perspective, a major consequence of the financial crisis is that
capital will be expensive for some time since there will be a lasting change in risk
assessment. Real capital formation will be particularly affected. Moreover, the
production structure of German industry is presently still geared to a demand boom in
the world economy, a situation that is unlikely to return when the recession is over.
For this reason production potential and its growth must be currently assessed far
lower than only a year ago.
A top priority for economic policy is the restoration of the full effectiveness of the
banking sector. Although the German government responded rapidly with a rescue
package, this has not eliminated the problems in the banking sector. The risk is that a
persistent credit crunch will emerge. Because of this policy-makers have the urgent
task of advancing the re-capitalisation of the banks. By hesitating the situation could
Summary of the Joint Economic Forecast in Spring 2009 (23 April 2009)
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worsen or at least the crisis could be prolonged. Then a scenario similar to Japan in
the 1990s would be likely.
The industrialised countries have taken different approaches to tackling the problems
in the banking sector, and there certainly is no blueprint for the best solution. It is
unavoidable, however, that the German government must increase pressure on the
banks and force them to accept state assistance. Even nationalisation would be a
lesser evil than a persistence of the difficulties. The sooner the situation can return to
normal, the more other measures of economic policy can improve the outlook for
economic activity. In particular this would enhance the effectiveness of the monetary
policy.
Faced with the depth of the economic downturn and low inflation in the euro area, the
European Central Bank should lower key lending rates to 0.5 percent. Even a zero
interest rate would not be a sufficient reaction to the crisis. Instead, the ECB should
design its tender business with a greater longer-term perspective than has been the
case, as it is apparently planning to do. If a lasting drop in lending volume or the
money supply aggregates in the euro area cannot be prevented in any other way, the
ECB should adopt a policy of quantitative loosening, i.e., it should buy corporate and
government bonds. To be sure, a circumvention of the banking sector is less
promising than in the Anglo-American countries, for example. Also the decision as to
which government bonds should be acquired is politically explosive for a
supranational central bank like the ECB. However, faced with the choice of either
purchasing bonds or allowing deflation to take hold, the former would be the lesser of
the two evils.
German fiscal policy has responded to the recession with two economic stimulus
packages. They contain measures that could support medium-term growth such as
investment projects, the lowering of the marginal rates of taxation and the reduction
of social insurance taxes. For this reason it is justifiable to temporally finance these
measures by taking on new debt. This of course does not apply to measures
designed to stimulate consumption in the short term and thus have a distorting effect,
such as the “scrapping grant” for older cars.
Particularly against the background of the foreseeable increase in the budget deficit,
a further economic stimulus package is not advisable under the present
circumstances. A more expansive fiscal policy is only justifiable under specific
conditions. If the efforts of the governments in the euro area to restore the banking
Summary of the Joint Economic Forecast in Spring 2009 (23 April 2009)
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sector fail, and if for this reason the financial crisis worsens throughout Europe and a
credit crunch emerges, the economic outlook would again clearly deteriorate. If even
an unconventional monetary policy were not able to stimulate the economy,
additional fiscal policy measures should be discussed, which would have to be
synchronized on a European level.
* 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]