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Joint Economic Forecast Spring 2012:
Upswing in German Economy– European
Debt Crisis Smoulders On
Press Summary
Embargo:
Thursday 19 April 2012, 11.00 a.m. MESZ
Joint Economic Forecast Project Group
Completed in Munich on 17 April 2012
Joint Economic Forecast Spring 2012
Upswing in German Economy – European Debt Crisis Smoulders On
After a weak winter half year, the German economy is now experiencing an upswing. The
Institutes forecast a 0.9% increase in real GDP for 2012 and a 2.0% increase for 2013. The
situation in the employment market should continue to improve and the number of unemployed
is expected to drop to 2.8 million in 2012. Germany’s deficit ratio is forecast to drop to 0.6%.
Since its debt ratio remains very high at over 80%, the Institutes take a critical view of the
current flagging in consolidation efforts. The debt and confidence crisis in the Eurozone
continues to smoulder. Forecasts of the respective debt ratios of Italy, Ireland and Spain indicate
that the situation in these countries can only be stabilized if planned reforms are actually
implemented, and in the absence of any renewed loss of confidence on the part of the financial
markets.
The acute risks for the global economy decreased significantly in spring 2012 versus last
autumn. Confidence among business and consumers, which was knocked hard in the second
half of 2011, has recovered in most regions since the beginning of 2012. The pace of world
output has also picked up slightly in recent months, after clearly losing impetus during the
second half of last year. The outlook for the global economy nevertheless remains subdued as
the European debt crisis remains unresolved and continues to pose a major threat to the world
economy. Additional negative factors have also come to bear recently like oil prices, which
have soared in recent weeks. Moreover, the pace of economic growth in China and other
emerging economies has slowed down too.
Despite the current upturn in confidence indicators, the Institutes do not expect a strong
upswing in the world economy during the forecasting period due to the continued presence of
a number of negative factors. Financial policy in many of the world’s key advanced
economies, and especially in several Eurozone countries, is expected to have a dampening
effect. Moreover, private households and business in many economies are still attempting to
reduce their debts. However, the delayed effects of private debt reduction should gradually
weaken over the forecasting period, especially in regions where the situation in the
employment market, and consequently income prospects, are clearly improving, like in the
USA, for example. Under these conditions gross domestic product in advanced economies
should see only subdued growth. Indeed, gross domestic product looks set to increase by a
mere 1.3% in 2012, while output should increase by 1.8% in 2013.
Economic activity in emerging economies will remain constrained by weak growth in
advanced economies over the forecasting period. Domestic forces for growth are only
expected to gather strength again gradually. Gross domestic product looks set to increase more
slowly in 2012 and 2013 than in the two preceding years. The overall increase in world output
is forecast to decline to 2.5% in 2012, but should return to last year’s level of 3.0% in 2013.
World trade will pick up gradually over the forecasting period. It should show an average
annual increase of 4.4% in 2012 and will probably increase by 6.6% in 2013.
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Joint Economic Forecast Spring 2012
Key Forecast Figures for the Federal Republic of Germany
2008
2009
2010
2011
2012
2013
Gross domestic product (GDP)
(% change on previous year)
1.1
– 5.1
3.7
3.0
0.9
2.0
Employmenta) (1,000 persons)
40 345
40 362
40 553
41 100
41 570
41 894
Unemployment (1,000 persons)
3 258
3 415
3 238
2 976
2 794
2 623
Unemployment rate b) (in %)
7.8
8.1
7.7
7.1
6.6
6.2
Consumer pricesc)
(% change versus previous year)
2.6
0.4
1.1
2.3
2.3
2.2
Unit labour costsd)
(% change versus previous year)
2.3
5.5
– 1.1
1.4
3.0
1.8
General government financial balancee)
in EUR billion
– 1.4
– 76.1
– 106.0
– 25.3
– 15.8
– 4.3
as % of GDP
– 0.1
– 3.2
– 4.3
– 1.0
– 0.6
– 0.2
Balance of Current Accounts
153.6
140.6
150.7
147.7
143.9
151.0
in EUR billion
as % of nominal GDP
6.2
5.9
6.1
5.7
5.5
5.5
a)
Nationally. – b) Unemployed as % of civil working population (definition according to the Federal Employment Agency). –
c)
Consumer price index (2005 = 100). – d) National employed compensation per worker in relation to real domestic product per
employed person – e) compiled on a national accounts basis (ESA 1995).
Sources: Federal Statistical Office, Federal Employment Agency, German Bundesbank; 2012 and 2013: forecast of the
Institutes.
After a lull that lasted several months, the German economy picked up again in spring 2012.
Thanks to the impression of an escalating debt and confidence crisis in Europe and a cyclical
downturn, overall economic output saw practically no increase last winter. Since then the
world economic environment has brightened slightly and measures taken to mitigate
turbulence in the Eurozone have helped to stabilize the situation in the financial markets and to
reduce economic uncertainty. This is reflected in confidence indicators among other things.
The business expectations of German companies have followed an upward trend since
December 2011. The consumer climate has also improved again. However, the latest increases
in risk premiums for Spanish and Italian government bonds show that the debt and confidence
crisis continues to smoulder.
The Institutes expect the forces driving the economy to take the upper hand in Germany during
the forecasting period. Although economic activity in the rest of the Eurozone remains weak,
the ECB’s interest rate policy for the entire Eurozone and Germany’s attractiveness as a “safe
harbour” is exerting a downward pressure on interest rate levels, which is massively boosting
investment. Moreover, the price competitiveness of German companies, primarily due to the
weakness of the euro in the currency markets, is higher than at any time over the past 30 years.
Exports therefore continue to follow an upward trend despite the recession in German
manufacturers’ key sales market, the Eurozone, and the slow pace of improvement in the
global economic environment. The labour market is ultimately in very good shape, which is
partly due to past labour market reforms; and the continued decline in the structural
unemployment rate is stimulating earnings, earnings expectations and private consumption.
Against this background, the increase in output should clearly gain impetus as of the spring
and aggregate economic capacity utilization should increase significantly over the forecasting
period. As in previous years, the main impulses will come from domestic demand, and
especially from investment and private consumer expenditure. In view of weak economic
activity in the rest of the Eurozone exports, on the other hand, are only expected to pick up
haltingly, which is one of the reasons why international trade will not make any positive
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Joint Economic Forecast Spring 2012
contribution to growth in gross domestic product in 2012 and 2013. Overall, real gross
domestic product should total 0.9% in 2012. The 68% forecast interval extends from 0.2% to
1.6 %. In 2013 gross domestic product should increase by 2.0% (forecast interval 0.5% to
3.5%).
The number of persons in employment should increase by 470,000 in 2012 and by 325,000 in
2013, but the decrease in unemployment will be disproportionately lower because the size of
the workforce is expected to increase, partly due to higher worker immigration. The
unemployment rate will nevertheless decrease by around half a percentage point in both years
and should drop to 6.2% by the end of the forecasting period.
Against a background of rising capacity utilisation and the growing labour scarcity, the
upsurge in wages and prices should increase significantly in the forecasting period. Real
wages will probably increase by over 3% in both years. Consumer prices will rise above the
2% mark both during this and next year to 2.3% and 2.2% respectively.
The Federal Government’s budget deficit should drop to 0.6% in relation to gross domestic
product in 2012 due to its consolidation policy. In view of the favourable economic situation,
the Institutes forecast a further decrease to 0.2% in 2013. Structurally the deficit ratio should
be 0.6% this year (at almost normal levels of production capacity utilisation) and looks set to
drop to 0.4% next year.
The biggest downside risk to economic development in Germany remains the debt and
confidence crisis in the Eurozone, which essentially remains unresolved. Although the ECB
has reduced stress in the banking system thanks to extraordinary liquidity policy measures, in
the end, this has only succeeded in winning time. Should the financial markets lose their
confidence in the Eurozone countries once again – perhaps because the requisite financial
policy reforms are not implemented - this will affect the German economy too. However, there
is also potential for stronger growth than forecast here. Interest rates in many countries have
fallen to historical lows. This is especially true of Germany, where monetary framework
conditions are particularly favourable at the moment.
Economic policy has remained overshadowed by the euro crisis in recent months. The
Institutes once again propose that an insolvency mechanism should be created for Eurozone
countries. Moreover, they argue that responsibility for the regulation and supervision of the
interconnected, pan-European banking and financial system should be bundled in a central
institution like the European Banking Authority, which has strong enough powers and
sufficient financial resources to recapitalize distressed, systemically important banks and
liquidate them if necessary, while protecting the system. Countries absolutely must conform
with the fiscal pact to contribute to the sustainability of public finances. There should only be
recourse to the ESM in exceptional cases, namely in cases of acute liquidity problems, to limit
the problem of “moral hazard”. For the moment it still remains unclear what course of actionis
to be taken if the problems in the financial sector escalate.
To date all concerned have obviously relied on intervention by the ECB in an emergency. To
prevent ailing financial institutions from collapsing, it provides unlimited liquidity, which is
now available for a term of three years and at reduced collateral requirements. This has led to
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Joint Economic Forecast Spring 2012
massive distortions and has therefore generated economic costs at other levels, which is clear
from the Target 2 balances. Moreover, in the absence of suitable mechanisms for resolving the
crisis, there are fears that the ECB will not normalize its measures until none of the
Eurozone’s banking systems present a threat any longer. However, this would amount to
orienting monetary policy towards the weakest member state, rather than the Eurozone as a
whole. The ECB could then no longer act appropriately to fight inflation, with negative
consequences for price stability.
There are different views as to how the ECB can be released from its predicament. The IWH
and RWI believe a “Buyer of Last Resort” is necessary to specifically ensure that the
sustainability of a country’s public finances is not lost due to a mere increase in interest rates.
IfW and Ifo do not believe that this would be effective because German exposure volumes
would be significantly increased, while pressure from the capital markets on crisis countries
would be considerably lowered, reducing the impetus of reform.
The German Bundestag has run significant risks for Germany by approving the bailout
packages. To ensure the Federal Republic’s ability to act in the future – partly in view of these
risks – swift progress towards budget consolidation needs to be made in Germany. Its debt
ratio of 80% of gross domestic product is still far above the agreed upper limit of 60%.
Against this background, the current flagging in consolidation efforts is to be seen critically.
Cyclically-induced additional revenues and reduced expenditure are no replacement for
structural adjustments. The budget discharge announced by the federal government with its
“future package” (Zukunftspaket) should be implemented; and in cases where targets no
longer seem realistic, other measures should be passed. Shifting the load from the federal
budget to the social security system – as the Federal Government plans to do – does not
constitute an effective tool since it does not change the overall deficit. However, the Federal
Government is not the only body with obligations as far as the debt brake is concerned. Many
Länder governments will also have to make serious efforts to achieve structurally balanced
budgets as of 2020.
The Institutes have analysed the debt sustainability of the crisis countries Greece, Ireland,
Italy, Portugal and Spain using projections of their debt ratios. In a baseline projection, which
assumes that the reform measures implemented in the crisis countries to date gradually begin
to take effect and that interest rates do not return to record peaks, it should be possible to
stabilise the situation in Ireland, Italy and Spain; and these countries should be able to reduce
their debt ratio in the mid-term. However, any weakening of the will to reform and/or
significantly higher interest rates on existing state debt would make public debt unsustainable.
In Greece and Portugal the situation is more complex. The debt situation in both countries can
at best be expected to stabilise at a very high level.
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