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Ifo Economic Forecast 2009:
German Economy in Recession
Press release
Embargoed until:
Thursday, 11 December 2008, 10.30 hrs CET
Munich, 11 December 2008
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The world economy is experiencing a massive downturn. The severe crisis in the
international financial markets that began in the United States with the collapse of the
subprime mortgage market in 2007 has now spread to all sectors of the economy. For
businesses and households, financing conditions have worsened; in addition asset losses
and profit outlooks are having a dampening effect. In many countries contractive
multiplier processes have been set off. The only relief has come from the sharp decline
in crude oil prices, which has given central banks scope for dropping key lending rates.
The world economy climate as measured by the Ifo World Economic Survey fell in the
fourth quarter of 2008 to its lowest level in more than 20 years. The decline in the
indicator again results from more unfavourable appraisals of the economical situation,
but also the expectations for the next six months have worsened further. The cooling of
the world economy climate this time has affected not only the large economic regions of
North America, Western Europe and Asia but also Central and Eastern Europe, Russia,
Latin America and Australia. All in all, this survey data constellation points to a global
recession in 2009.
In Germany economic activity has been clearly in decline since the middle of 2008. In
the first year half of the year, the economy once again experienced a strong recovery.
But since the summer the massive worsening of the world economic environment
became increasingly evident; moreover, the financial crisis grew much worse. A clear
decline in value added in Germany was first seen in the third quarter. The operating rate
of the economy, however – using the Ifo capacity utilisation rate in manufacturing as a
proxy – still stood clearly above its long-term average. The labour market situation has
also remained extremely robust, partly as a result of the flexible use of temporary
employment and the depletion of overtime accounts. In the meantime, however, job
offers have decreased and reports of shorter working hours have increased perceptibly.
On the whole, the available business-cycle indicators point to a rapid decline in
economic output in the last quarter of 2008, seasonally and calendar adjusted; at a
current annual rate the decline was probably -3½ percent. Output was 0.4 percent below
the comparable previous-year position (calendar adjusted: -0.5 percent). At the same
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time the capacity usage ratio fell below its low-term average in the fourth quarter. The
German economy is consequently in recession.
On average for 2008, real GDP has probably grown by ca. 1.5 percent, after 2.5 percent
in the previous year. However, there were more working days in 2008 than in 2007 so
that accounting for these calendar differences the growth rate in GDP amounts to only
1.2 percent in 2008. The economic weakening was first noticeable this year with
exports, which have been falling sharply since spring. On average for 2008, however,
due to the large overhang, a noticeable increase in exports will be registered. The
German economy is particularly affected by the weakening in international economic
activity because especially the demand for capital goods has declined, the dominant the
German export item. Plant and equipment spending is also decreasing, although the
result of the previous year result is likely to have been clearly surpassed. Private
consumption was stagnant in 2008, on average; the continuous increase in energy and
fuel prices up to the autumn as well as food price increases weakened spending power,
on balance.
In the coming year, the business-cycle traffic lights will switch to red. The German
economy, which because of its trade orientation had benefited from the strong upswing
in the global economy now conversely is being particularly pulled under by the vortex
caused by the financial crisis. As a result, economic output will continue to decline
strongly. On average for the year, real GDP – unadjusted and also calendar adjusted –
will decline by 2.2 percent. In the wake of the world recession, exports will be reduced
drastically. With declining capacity utilisation, collapsing profit outlooks and restrictive
financing conditions, plant and equipment spending will decline sharply. Construction
will also slide into negative territory with the exception of public-sector non-residential
construction. Private consumption, despite increasing real average wages, will make
only little progress due to the clear drop in employment and because the savings rate
will remain high in light of the financial turmoil and the crisis in confidence. The
inflation rate will average ca. 1 percent for 2009, and in individual months of the year it
will even be noticeably below this mark.
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Stabilisation is not expected until 2010, with the gradual subsiding of the financial crisis
and the slight improvement of the international environment. Because of the underhang,
however, real GDP will still fall by ca. 0.2 percent on average for 2010; calendar
adjusted by ca. 0.3 percent. Despite all this, the output gap – with a potential rate of 1½
percent – will decline further.
Labour demand will deteriorate in the forecast period. In the coming year the number of
wage and salary earners will decline by 0.8 percent to ca. 40 million. In the course of
2009 some 540,000 additional people will register as unemployed. This will result in an
average unemployment rate of 8.0 percent for the year. In 2010 this will continue so that
the average number of unemployed will nearly reach the 4 million mark, which
corresponds to a rate of 9.2 percent.
After the state’s financial balance continuously improved from 2003 to 2008, a setback
is expected for 2009 and 2010. The main reason is the worsened overall economic
situation, whereby fiscal policy has already made a gradual shift in course away from
consolidation and towards expansion. For 2009 a budget deficit of around 34 billion
euros is expected or 1.4 percent of nominal GDP. For 2010 the weak economy and the
continual worsening of the labour market situation lead us to expect a further increase in
the budget deficit of 1½ percent points. Then Germany will again be nearly at the
Maastricht ceiling of 3 percent.
The insecurity of economic forecasting is combined with special downward risks
resulting from the worldwide financial crisis. But there are also upward risks: At the
time of this forecast it is still not clear whether there will be additional economic
stimulus programmes in Germany and their financing volume. Moreover, the banking
crisis could be resolved more rapidly than expected, also due to further government
intervention, for example in the interbank market. Then lending policies could become
less restrictive than anticipated and the interest rate reductions of the European Central
Bank would have a direct effect on lending margins.
Ifo Economic Forecast (11 December 2008)
Federal Republic of Germany
Key Forecast Figures
2006
2007
2008
2009
2010
(1)
(1)
(1)
Percentage change over previous year a)
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)
b)
Employment (1.000 persons)
Unemployment (1.000 persons)
Unemployment ratec) (in %)
1,0
0,6
7,7
11,1
5,0
8,0
2,1
12,7
11,9
3,0
-0,4
2,2
4,3
6,9
1,8
8,0
1,1
7,5
5,0
2,5
-0,1
2,5
4,6
5,6
3,7
6,3
1,6
4,0
4,6
1,5
0,6
2,0
-4,9
-10,0
-1,6
2,5
-0,1
-5,7
-1,3
-2,2
0,0
1,6
-0,1
-1,4
0,8
0,9
0,4
0,5
1,9
-0,2
39097
4487
39768
3776
40337
3266
40018
3471
39433
3971
10,3
8,7
7,5
8,0
9,2
1,6
2,3
2,6
0,9
1,4
-35,9
-4,2
1,8
-34,1
-72,0
-1,5
-0,2
0,1
-1,4
-2,9
2,9
2,6
1,0
-1,3
0,3
2,2
2,1
3,4
1,2
1,5
d)
Consumer prices
(% change on the previous year)
e)
General government financial balance
- EUR billion
- in % of GDP
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 (2000=100).e) On national accounts definition (ESA 1995).-f) Harmonized index of consumer prices (2005=100).
Source: Eurostat, Federal Statistical Office, Federal Agency of Labour, forecast by the Ifo Institute.