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Ifo Economic Forecast 2010: The Lacklustre German Economy Press release Munich, 15 December 2009 2 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 3 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. 4 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, 5 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.