Download Summary (PDF, 47 KB)

The Recovery Continues –
Considerable Risks Remain
Joint Economic Forecast Spring 2010
Translation of the Summary (pages 8-9)
The Recovery Continues – Considerable Risks Remain
In spring 2010 the recovery of the world economy is progressing; the financial and
economic crisis of 2008 and 2009 is gradually being overcome. However, the pace of
expansion is very different in the individual regions of the world. In some newly
industrialised countries, particularly in Asia, the pace is exceptionally fast, and there
is even danger of overheating in some economies. On the other hand, the utilisation
of overall economic capacities remains low in the industrialised countries. Here the
recovery has not yet been consolidated but continues to be supported considerably
by expansive economic policies.
The relatively early and robust recovery of production and demand in the newly
industrialised countries of Asia provided a noticeable impetus for the industrialised
countries, whose real net exports thus rose significantly. Even though a collapse in
output also occurred in the newly industrialized countries in autumn 2008, which was
considerably powerful in some instances, it is now evident that the effects of the
financial crisis have not changed the medium-term growth path very much because
of mostly sound financial sectors and a generally favourable macroeconomic
environment in the newly industrialized countries. In this respect we indeed can
speak of a decoupling of important newly industrialised countries from developments
in the industrialised countries.
The aftermath of the financial crisis is still being felt in the industrialised countries.
The situation on the financial markets in Europe and in the United States, which had
eased significantly in the summer half year of 2009, has not improved much since
then; at the moment appreciable stimulation is not coming from this side. Moreover,
the financial markets are becoming increasingly worried about national finances.
Although the financial investors currently only see considerable insolvency risks for
individual, mostly smaller countries, state indebtedness is presently increasing
strongly almost everywhere, and hence economic policy in the industrialised
countries must be geared in the medium term towards budget consolidation. The
results of the financial crisis will still dampen the spending propensity of private
households and businesses for some time, especially in countries where the financial
and real-estate sectors are experiencing a structural crisis. But also in countries like
Japan or Germany that were affected particularly by the collapse in exports,
production is likely to recover only slowly from the strong setbacks suffered in the
course of the crisis.
As a result the economic dynamics in the industrialised countries are expected to be
weak in this and in the coming year. With a restrained economic expansion, the
situation on the labour market will improve only gradually. In the United States
economic activity will trend upwards in the forecast period, but economic growth will
slow down perceptibly, after the strong expansion in the second half of last year. The
euro area will be a cyclical latecomer also in this and in the coming year; some
countries in which the desolate situation of the public budgets is forcing governments
to pursue a strict consolidation course will even remain in recession. In contrast, the
economic expansion in the newly industrialised countries is likely to remain strong.
All in all world economic output in 2010 will grow by 2.9% and by 2.7% in 2011.
World trade will increase by 6½% in this and in the coming year, a pace that matches
its long-term average. The price climate should remain quite calm, even though
inflation rates in 2010 will be higher than in 2009 due to increased oil prices.
In Germany the economic recovery stalled temporarily in the winter half year
2009/2010, because of largely passing factors. In its basic tendency, economic
activity will continue to be directed upwards, after the deep plunge owing to the
financial crisis. New orders increased strongly at the beginning of the year, and
exports continue to recover. Business confidence is also strong. The now more
favourable atmosphere is evident in the fact that businesses despite the recent
weaker output are already slightly expanding personnel levels.
Economic policy is expected to have a countervailing impact on economic activity in
the forecast period. The ECB will retain its expansive interest-rate policy, in the
opinion of the institutes, and will concentrate for the time being on reversing its
extraordinary measures of liquidity provision. Fiscal policy, on the other hand, will
continue to provide perceptible stimulation to the economy this year. However, since
the stimulus programmes are running out and initial steps towards consolidation of
the national budget are expected, fiscal policy will have a dampening effect as of next
year.
Against this background the institutes expect that the revival of economic activity will
continue, but that its pace will be moderate. The recovery will continue to be driven
by exports, which had experienced an unexpectedly strong collapse in the recession.
Exports will profit from lively expansion particularly in the newly industrialised
countries, but also domestic demand will revive. Private consumption spending
should grow moderately with again rising real disposable income, and equipment
investments will return to a steady course. All in all, real GDP should increase in the
course of this year and on average for 2010 by 1.5%. In the coming year, the
domestic demand will grow moderately. Real GDP will increase in 2011 by an annual
average of 1.4%.
Since the beginning of the recession the labour market has been amazingly robust.
This unexpectedly favourable development is largely the result of two effects. Firstly,
the companies have been hoarding considerable numbers of workers, with help from
government support for short-time working schemes and the more flexible provisions
of collective wage contracts. Secondly, the labour market is still profiting from the
mostly moderate wage agreements of recent years. Employment is expected to fall
only slightly this year.
Unemployment will nevertheless decrease slightly, since the labour force potential is
declining as a result of demographic developments. For 2011 stagnation in
employment and a further decrease of unemployment is anticipated. The
unemployment rate (in the delimitation of the Federal Employment Agency) should
fall from 8.1% in 2010 to 7.9% in 2011. Consumer prices will increase only
moderately – the inflation rate this year will be 0.9% and in the coming year 1.0%.
The situation of the public budgets will continue to deteriorate. The deficit rate in
2010 is expected to rise to 4.9%. In the coming year, a decline to 4.2% is foreseen,
especially since the economic stimulus programmes are running out and initial
measures for budget consolidation will be undertaken.
The risks for economic activity remain great, partly because of the international
economic environment. Moreover, the situation in the banking sector remains difficult
even though credit restrictions have not further intensified. However, problems could
emerge again on the financial markets, for example if doubts arise regarding the
solvency of some states due to their high deficits.
As a result of the economic crisis, the medium-term outlook for the German economy
has also worsened; GDP in the coming years will be perceptibly lower than assumed
before the crisis. Firstly, the production potential in Germany is presumably lower
than previously estimated; secondly, production will return to its trend only slowly.
The institutes expect that the production potential in the period 2009 to 2014 will
increase by 1% a year. The economic recovery in Germany should continue after
2011 at a slightly accelerated pace. Nevertheless, after the strong collapse last year,
real GDP will not reach the level of 2008 until 2013. At the end of the projection
horizon, the gap between current production and the production potential will be
closed.
Fiscal policy in Germany will likely set off on a consolidation course in 2011.
Presumably, the economic situation will be solid enough that the recovery will not be
damaged by government savings policies to such an extent as to bring about a
relapse into recession. Criticism is to be directed at the federal government, despite
its goals and its own proclamations, for not stating how it will go about budget
consolidation. It does not intend to make these plans public until June this year.
To limit the damage of consolidation on growth and employment, the institutes have
repeatedly recommended that the government pursue a “qualified” consolidation
course, i.e. to narrowly limit the increase in government expenditures and to shift
them to investments in human and physical capital. Savings should thus be
concentrated on so-called consumptive costs and on financial assistance. In addition,
tax concessions should be cut back.
The ECB enjoys a high confidence rating. Also for this reason, its expansive course
has not led to a rise in inflation expectations; these are still closely anchored on the
ECB’s stability goal. Since capacity utilisation will remain low in the forecast period,
no dangers to inflation threaten from this side. The institutes expect that the ECB will
keep its key lending rates unchanged during forecast period.
The current situation in the euro area illustrates the need for economic-policy action
in especially three areas. Firstly, the key for the reduction of deficits on current
account rests in the deficit countries, especially since, at least in Spain and in
Greece, the balances of trade, also vis-à-vis countries outside of the euro area, have
clearly deteriorated. The deficit countries must increase their price competitiveness in
order to increase their exports or to substitute their imports.
Secondly, with regard to the solution of the financial problems of individual countries,
the institutes are of the opinion that the IMF should assume an important role. It can
threaten more credibly than EU institutions that there will be no financial assistance if
states do not observe its stipulations and it also has more experience with the
organisation of national rescue programmes. However, if the IMF becomes involved,
it must be assured that the independence of the monetary policies in the euro area is
not jeopardised because of financial assistance for a member state or by
corresponding stipulations of the IMF. This is how the statements of the European
Council of 25 March 2010 and of the countries of the countries of the euro area of 11
April 2010 are to be understood. These statements have tentatively promised, as the
ultima ratio in case the Greek national budget cannot be financed by the capital
markets, a package of credits from the IMF and coordinated bilateral credits from the
member states. However, such assistance contradicts the spirit of the Maastricht
Treaty. In order not to further damage the effectiveness of the monetary union, the
institutes strongly recommend that the IMF supervise the conditionality called for in
the statements and the associated decisions on releasing further tranches. Moreover,
this must not lead to the inception of a “transfer union”.
Thirdly, it is a matter of complying with the system of rules of the monetary union,
since the current problems are also a result of the fact that many countries have not
complied with the stipulations of the Stability and Growth Pact in recent years. Over
the years it has became clear that the European Commission is not able to enforce
compliance with the rules. For this reason the institutes welcome the statement of the
European Council of 25 March 2010 calling for a strengthening of the European
system of rules.