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Ifo Economic Forecast 2009/2010:
Downturn Continues
Press release
Munich, 23 June 2009
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The world economy is in the midst of the deepest recession since the Great Depression.
The pace of the contraction, however, has probably slowed since this spring. Worldwide
programmes to boost economic activity have been implemented, and the expansive
monetary policies of the central banks are gradually having an effect. Also measures to
stabilise financial markets have been taken in numerous countries. Finally, real incomes
have been boosted by the strong declines in raw material prices. The world economic
climate as surveyed by the Ifo Institute improved in the second quarter of 2009 for the
first time since autumn 2007. However, the rise of this indicator was solely the result of
more favourable expectations for the next six months, whereas the appraisals of the
present economic situation continued to deteriorate, falling to a new historical low.
A quick recovery of the world economy is not to be expected. A major problem is still
the precarious equity capital situation of the banking sector in the United States and
Europe. This is the result of the necessary write-downs and valuation adjustments of a
magnitude that threatens the existence of the banks. To be sure, after the insolvency of
Lehman Brothers in September 2008, massive government intervention has prevented
more bankruptcies of major financial institutions. However, additional value
adjustments of considerable amounts are still looming. Also the recession-induced
failure of loan repayments may play an increasingly important role. In several important
countries there is also a depression on the real-estate markets, which likewise will
increase banks’ write-off requirements. As a result, the banks will strive to reduce their
balance sheets noticeably in order to improve the extremely strained relationship of their
capital to their balance-sheet totals. This will affect bank lending policies towards
private households and non-financial businesses especially when the demand for credit,
which has been dampened by the recession, picks up again. For this reason it can be
expected that the forces of economic recovery will unfold only very hesitantly and that
the current downturn will last much longer than would otherwise be expected.
This economic forecast assumes that the US recession will continue in the summer halfyear of 2009. It is expected that private consumption will decline in spite of the
extensive support measures from fiscal policy, also because the labour-market situation
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will deteriorate further. The stabilisation of investments will only be gradual. In Japan
economic activity will recover slowly after the collapse at the beginning of the year.
Although domestic demand is expected to decline, exports should show at least hesitant
growth impulses, especially since the economic situation of important trading partners
should brighten somewhat. In the euro area the weakened economic situation will
continue. Private consumption will decline as a result of the worsened labour market
situation and investments will fall further. Exports will also provide no stimulus to
economic growth.
Economic expansion in the newly industrialised countries is likely to recover gradually
in the forecast period. In China economic activity will benefit from the large economic
stimulus package; however, expectations of a quick return to the former boom phase are
dampened since exports, a major pillar of the previous upswing, will continue to suffer
from the global economic weakness. In India economic activity will remain relatively
strong due to the solid expansion of domestic demand. In the other eastern Asian
countries, however, it will only gradually stabilise after an initial shrinking. In Latin
America, the stimulating effects of monetary and fiscal policy measures, which are
extensive in some countries, will support the economic recovery. Some of the important
countries of the area should increasingly benefit from the recent incipient recovery of
raw material prices.
In total, world GDP will decline by 1.8% in 2009 before it increases by 2% in 2010.
This forecast is based on the countries taken into consideration by the International
Monetary Fund (IMF), whose growth rates were weighted using purchase power parities
of 2008. The increase in prices will flatten out strongly worldwide. Unemployment is
expected to continue to increase clearly as a result of the economic weakness.
This forecast is based on the assumption that the price for Brent crude oil will fluctuate
at 70 US dollars per barrel in the forecast period and that the euro/dollar exchange rate
will stabilise at 1.40. Under these assumed conditions, world trade will continue to
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decline initially before it gradually recovers. It will fall by 14% in 2009 and increase by
3% in 2010.
The German economy is experiencing the worst recession in the history of the Federal
Republic. According to the now available official statistics, economic output fell in the
first quarter of 2009, seasonally and calendar adjusted, by 3.8%, and already in the
fourth quarter of 2008 the economic output had declined by 2.2%. Germany has thus
experienced the sharpest collapse in growth of all major European economies. Also in
an historical perspective, this is without precedent. The main reason for this catastrophic
economic development since last autumn is the simultaneous worldwide collapse in
demand for capital goods and consumer durables that occurred in the wake of the
international financial crisis and collapse of confidence. The German economy has been
particularly hard-hit by this external demand shock due to its high dependency on
foreign trade and its specialization in cyclically sensitive industrial products.
After the drastic drop in the winter half year 2008/09, economic output has likely also
fallen in the second quarter, albeit at a reduced pace (current rate: –0.7%). Signs of the
start of a gradual stabilisation are seen in recent developments of a number of important
cyclical indicators such as production and incoming orders as well as the Ifo Business
Climate. The decline in economic output comes especially from manufacturing as well
as the sectors of financing, leasing and business services. For the first half-year 2009 a
seasonal and calendar adjusted decline in real GDP of 5.2% will occur in comparison to
the second half year 2008; in a year-on-year comparison the decline amounts to 7.5%.
The downturn will continue throughout the forecast period. After a temporary increase
in summer primarily driven by fiscal stimulus, the basic tendency of economic output
will be further contraction. Although no further dampening effects are foreseeable from
net exports, the decline in equipment and construction investments will continue. The
reduction in inventories has also not yet been concluded. In addition, private
consumption will fall starting in the autumn months due to the decline in employment
and strong increases in unemployment. Not until spring 2010 can we expect the fall in
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production and demand to bottom out. Afterward, real economic output should increase
somewhat. As the world economy gradually recovers, exports will increase somewhat;
also equipment investment should recover moderately. Towards the end of 2010,
anticipatory effects are likely due to the restoration of the declining balance method of
depreciation. The economic stimulus packages will stimulate construction investment.
On the whole, however, the economic dynamics will not be strong due to the weakness
of private consumption so that the operating rate of the economy will fall. On average
for 2009 total economic output will decline by 6.3%, in both unadjusted and calendaradjusted terms. In 2010, due to the low initial level, a decline of only 0.3% (calendar
adjusted: 0.4%) is expected.
The recession will become increasingly noticeable on the labour market as of the
summer months of 2009. The build-up of reduced working hours will come to a
standstill and the numbers of unemployed will increase at an accelerated rate. On
average for this year, employment numbers will fall by 460,000 and next year by as
much as 1.05 million. The number of unemployed will rise by 320,000, on average for
2009, and by 760,000 in 2010. At the same time, consumer prices will remain virtually
stable. For this year an inflation rate of 0.2% is expected; in 2010 it will average only
0.4%. The budget deficit will grow unusually strongly in the forecast period. In 2009
the deficit will increase to 3.4% of nominal GDP but in 2010 to 6.0%. This is caused by
the economic situation, which will lead to enormous revenue shortfalls and additional
expenditures, but there are also strong discretionary impulses in connection with the
government’s stimulus packages.
Ifo Economic Forecast 23 June 2009
Federal Republic of Germany
Key Forecast Figures
2007
2008
2009
2010
(1)
(1)
a)
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)
-0,4
2,2
4,3
6,9
1,8
8,0
1,1
7,5
5,0
2,5
0,1
1,8
4,4
5,9
3,0
6,5
1,8
2,7
4,2
1,3
0,3
1,4
-10,7
-22,4
-3,3
5,5
-1,8
-17,0
-8,3
-6,3
-0,8
1,7
0,4
-0,6
1,0
0,9
-0,3
2,3
2,4
-0,3
39768
3776
40330
3268
39856
3581
38806
4337
8,7
7,5
8,3
10,1
2,3
2,6
0,2
0,4
- EUR billion
-4,2
-3,1
-80,1
-141,1
- in % of GDP
-0,2
-0,1
-3,4
-6,0
2,7
0,7
-4,6
-0,3
2,1
3,3
0,1
0,5
b)
Employment (1.000 persons)
Unemployment (1.000 persons)
c)
Unemployment rate (in %)
d)
Consumer prices
(% change on the previous year)
e)
General government financial balance
memo item:
Real GDP in the EMU
(% change on the previous year)
f)
Consumer prices in the EMU
(% change on the previous year)
1) Forecast by the Ifo Institute.- a) Price adjusted.- b) Domestic employment.c) Unemployment as a % of labour force (employed and unemployed).- d) Consumer price index (2005=100).e) On national accounts definition (ESA 1995).-f) Harmonized index of consumer prices (HICP, 2005=100).
Source: Eurostat, Federal Statistical Office, Federal Agency of Labour, forecast by the Ifo Institute.