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Ifo Economic Forecast 2010:
The Lacklustre German Economy
Press release
Munich, 15 December 2009
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The world economy has come through the worst recession since World War II. Since
spring 2009 production and trade have again increased, stimulated by billions of euros
allocated to economic stimulus programmes, massively expansive monetary policy and
comparably low oil prices. In addition, a turnaround in the global inventory growth
cycle has occurred. The world economy climate derived from the Ifo World Economic
Survey improved in the fourth quarter for the third time in succession. The rise in this
indicator was the result of both more favourable expectations for the next six months
and less negative appraisals of the current economic situation.
The economy climate improved in all major economic regions. The rise in the economic
climate indicator was especially marked in Asia, where it even exceeded its long-term
average. Also in Western Europe and North America the climate indicator improved
noticeably in the fourth quarter of 2009. To be sure, the current economic situation is
still assessed quite unfavourably in all major regions, particularly in the euro area, in
North America, in Central and Eastern Europe and in Russia. However, the economic
expectations are now optimistic almost everywhere. This indicates that the revitalisation
of the world economy will continue.
The pace of growth will remain low, however. A key problem is still the weakening of
the international financial market, whose viability is still limited in important areas. In
addition, the banking system has suffered tremendous equity losses resulting from the
high value-adjustment requirement of structured securities. In important industrialised
countries there is also a real-estate crisis, which increases the write-off requirements of
their banks. Credit conditions thus remain restrictive worldwide, which is having
massively negative effect on the financing of investments and new jobs. Moreover, the
credit-financed economic stimulus programmes will run out during the forecast period
and the need to consolidate public budgets is becoming increasingly more urgent.
Finally, the central banks will tighten their monetary policy. This all will have a
dampening effect on the development of supply and demand.
In the United States the increase in GDP at the beginning of 2010 will still be
comparably strong, but will flatten out clearly thereafter. The removal of structural
imbalances - in particular the correction in the area of private consumption with a
concomitant further increase in the savings ratio – will have a perceptible retarding
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effect. Also the pressure placed on the financial system by the crisis is still enormous.
Further into the forecast period, total economic output may even temporarily decline
again slightly. However, despite this economic setback, the American economy will not
again slip into recession during the forecast period. The weakness of the US economy
will have a dampening effect on economic activity worldwide.
In Japan the expansion of the economy will initially remain weak in the forecast period
before it slowly livens up again. Private domestic demand will expand slowly due to the
lower utilisation of capacities and the poor situation on the labour market. Japan’s
foreign trade, however, will benefit from the revival of economic activity in the
emerging economies of Asia. In the euro area the economic expansion will remain
strong for the time being. Especially fiscal policy stimulus in Germany and France will
have a positive effect. In contrast, private domestic demand will only gradually
stabilise. After the expiration of the economic stimulus programmes, it is expected that
the economic dynamics will weaken. In total world GDP will increase by 3.1 percent in
2010 and by 2.6 percent in 2011, having declined by 1.1 percent in 2009. Price
increases will accelerate somewhat worldwide. The number of unemployed will
continue to increase due to the weakness of economic activity.
This forecast is based on the technical assumption that the price for Brent crude oil will
fluctuate at around 72 dollars per barrel and that the exchange rate of the euro will
stabilise at around 1.47 US dollars. World trade - measured by OECD data – will
increase in 2010 by 5 percent and in 2011 by 4 percent, having declined dramatically by
around 11 percent in 2009.
In Germany economic output stabilised in the spring. In the second quarter real GDP
expanded, seasonally and calendar adjusted, by 0.4 percent, and in the third quarter by
0.7 percent. Due to the exceptionally strong decline in the preceding half year by almost
6 percent, total economic output, and here especially the production in export-dependent
industries, remained overall at a very low level, however. The rate of capacity utilisation
– extrapolating from the Ifo capacity utilisation measurement in manufacturing - is
currently some 10 percentage points below the long-term average.
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The improvement of economic activity in Germany was largely due to a brightening of
the world economic environment. The German export economy, which because of its
specialisation pattern was particularly affected by the worldwide collapse in demand for
capital goods and consumer durables in the past winter half year, was able to record a
plus of 3.4 percent in the third quarter of 2009, seasonally and calendar adjusted. In
many countries expansive fiscal and monetary policy measures have had their effects,
especially since inventories are again being built up worldwide. In terms of the domestic
economy, gross capital formation has increased again as a result of the economic
stimulus packages of the federal government. In addition, inventories have been
increased massively. On the other hand, real private consumption spending, which had
been stimulated by numerous expansive fiscal measures in the first half of 2009, fell
perceptibly in the third quarter. Especially automobile sales declined, particularly
because the funds for the car scrappage scheme had been exhausted.
On the whole, and seasonally and calendar adjusted, economic output has increased
again in the final quarter of 2009, although at a somewhat slower pace (0.5 percent)
than in the previous quarter. For the second half year of 2009 in comparison to the first
half of the year, there was a 1.2 percent increase in economic output, seasonally and
calendar adjusted; in comparison to the previous year, which was marked by a strong
decline in the winter half year, the result is a drop of 3.0 percent, however. For 2009 as
a whole, real GDP fell by 4.9 percent.
In the forecast period, the road signals of economic activity in Germany remain on
yellow, and a green phase is still not expected. To be sure, the endogenous propellant
forces are gradually becoming a little stronger again, but the funds made available by
the economic stimulus packages are gradually running dry. In addition, the credit
constraints for new investments and jobs remain strong. The state of the German
economy is thus labile, and a self-sustaining recovery is not evident.
Export dynamics will be moderate in the forecast period because economic activity in
Germany’s most important customer countries is not completely improving. A similar
development is expected, on the whole, in terms of imports so that net exports will
provide no appreciable growth contribution to GDP. With continuingly low capacity
utilisation rates, investments in plant and equipment will only increase slightly,
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especially since no improvement in the restrictive financing conditions is expected.
Somewhat stronger dynamics can be expected towards the end of 2010 due to
anticipating effects from the re-introduction of the declining-balance depreciation
instrument. In the area of public construction spending, the economic stimulus packages
will continue to have an effect, but commercial construction, which has weathered the
storm up till now, will clearly slip into negative territory. Incomes and private
consumption will receive short-term stimulus from the “Growth Acceleration Act” and
the tax reductions that have already been decided on, but thereafter growth will be
moderate. An additional dampening effect will come from the fall in demand for
automobiles since many brought their purchases forward to 2009. The savings-income
ratio will remain high in light of sluggish economic growth. On average for 2010, real
GDP will likely increase by 1.7 percent, and by 1.2 percent on average for 2011.
On the labour market, which lags economic developments, employment will gradually
adjust to the low level of production. The number of people on the short-time working
scheme will decline with a resulting increase in unemployment. On average for next
year, wage and salary earners in Germany will decline by 350,000. The number of
unemployed will increase by ca. 180,000 to 3.6 million, on average for the year. The
increase in consumer prices will be moderate, with the large gap between the actual and
the potential output level having a dampening effect. The budget deficit will increase
strongly in 2010, amounting to 5.1 percent of nominal GDP. The main influencing
factors here are the weak economy and the additional expenditures in connection with
the support measures of the federal government.
Ifo Economic Forecast (15 December 2009)
Federal Republic of Germany
Key Forecast Figures
2007
2008
2009
2010
2011
(1)
(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)
-0,3
1,7
5,0
11,0
0,0
6,5
1,0
7,5
4,8
2,5
0,4
2,1
3,1
3,3
2,6
5,3
1,7
2,9
4,3
1,3
0,3
2,5
-8,4
-20,0
-0,4
6,3
-1,6
-14,3
-8,3
-4,9
0,2
1,3
0,9
1,0
0,5
4,0
0,9
8,4
6,9
1,7
0,7
1,1
0,5
1,5
-0,7
4,2
0,8
4,5
3,9
1,2
Employmentb) (1.000 persons)
Unemployment (1.000 persons)
39724
3776
40279
3268
40267
3426
39982
3607
39983
3617
8,7
7,5
7,9
8,3
8,3
2,3
2,6
0,3
0,6
0,8
- EUR billion
4,7
1,0
-73,3
-124,7
-138,0
- in % of GDP
0,2
0,0
-3,0
-5,1
-5,5
2,7
0,6
-3,9
1,0
0,9
2,1
3,3
0,2
0,9
1,2
Unemployment ratec) (in %)
d)
Consumer prices
(% change on the previous year)
General government financial balance
e)
memo item:
Real GDP in the EMU
(% change on the previous year)
Consumer prices in the EMU
(% change on the previous year)
f)
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.