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PRESS RELEASE
Embargo: Tuesday, 17 December 2013, 10.30 a.m. CET
Ifo Economic Forecast 2013/2014: German Economy Picks Up Steam
Munich, 17.12.2013 – Aggregate economic production in Germany looks set to
accelerate in the quarters ahead, according to the Ifo Business Climate Index.
The latter has followed a clearly upwards tendency in recent months. The world
economic environment has also improved and domestic economic conditions
are favourable. Uncertainty on the part of companies has diminished, but
remains sufficiently high on the part of investors contemplating investing abroad
to keep them interested in making a relatively secure investment in Germany.
The outlook for private households’ income is favourable. Against this
background, economic expansion is expected to be driven by the domestic
economy. Real gross domestic product for 2014 should increase on annual
average by 1.9% with a (2/3 probability) uncertainty interval of 0.8% to 3.0%.
World economic situation
The pace of the world economy picked up slightly over the summer. World trade
increased slightly more sharply than at the beginning of 2013. For the first time in four
years the industrialised countries were the driving force behind the acceleration in the
global economic expansion. Further progress in debt reduction was seen in the private
sectors in the USA and Great Britain and was accompanied by highly expansive
monetary policy. Fiscal policy was also less restrictive in Europe, and uncertainty
regarding the integrity of the monetary union diminished slightly.
Key emerging economies, in the meantime, performed relatively weakly by historical
standards. Among other factors this was due to an expected gradual tightening of
monetary policy in the USA. Turkey, India, Indonesia, Brazil and South Africa in
particular suffered high outflows of foreign capital, which had a clearly negative impact
on the refinancing conditions for their private and public sectors and placed their
currencies under huge depreciation pressure. In several emerging economies,
however, there were also structural reasons for the weakening, which became
increasingly apparent over the summer.
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During the summer the euro area’s economy shook off the recession that had lasted for
over a year, which was partly due to fiscal policy gradually becoming less restrictive.
An important factor was the free insurance for the government bonds of crisis
countries, which was offered by the European Central Bank (ECB) as of late summer
2012 in the form of its OMT programme. This programme provided the crisis-afflicted
economies with interest rate relief on loans and granted them easier access to credit.
At the same time, the economy of the monetary union remains in an extremely poor
state characterised by a high degree of heterogeneity between the individual member
states. Several economies remain fragile and prone to turbulence in the financial
markets due to huge private and/or public sector debts that were mostly accumulated
during the decade prior to the crisis. Furthermore, non-performing loans in Spain,
Portugal, Greece and Italy continue to follow a sharp upwards trend. However, the root
of the problem lies in a lack of competitiveness. As long as the latter is not restored, it
will be impossible for several countries to bear their foreign debts. Unfortunately, there
is an unresolvable conflict between short and long-term goals. Measures that deliver
growth impulses in the short-term delay the restoration of competitiveness via real
devaluation, and thus prevent a long-term recovery.
Assumptions and risks
This forecast is based on the assumption that there is no renewed escalation of the
euro crisis. The most important precondition is that structural adjustments in the euro
area proceed at a moderate pace, as they have to date, and that public deficits are
reduced gradually. Potential drawbacks regarding the willingness to reform - and
therefore on the restoration of international competitiveness in the crisis-afflicted
countries – stem from the ECB’s loan assistance (Target), the complementary credit
provided by the community of states, the loosening of fiscal policy goals, vouchsafed
by the EU Commission in several euro area countries at the beginning of the year, as
well as the ECB’s OMT programme. These measures gave rise to economic stimuli
and, for many governments, lowered previously high refinancing costs, but they also
reduce the pressure to reform. This forecast would be jeopardised if long-term inflation
expectations were to fall below the ECB’s goal of around 2%. This forecast is based on
the assumption that no long-term deflation is expected on average in the euro
countries. The formation of price bubbles due to the extremely cheap availability of
cash would also undermine this forecast.
Outlook for the world economy
Insofar as the baseline scenario materialises, global economic expansion will gradually
pick up speed over the forecast period. Producer and consumer confidence has
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improved in all key regions. Unlike over the past five years, the driving forces behind
the economic acceleration are not the emerging countries, but the advanced
economies, in which an improvement in the asset position of private households and
expansive monetary policy are boosting the recovery. Moreover, the stance of fiscal
policy in a number of countries should also be less contractive.
The heterogeneity between the member states of the euro area should remain high.
Several member states are still facing severe structural problems. Insofar as the
baseline scenario materialises, the slow recovery will nevertheless continue because a
decline in imports tends to boost the domestic economy. Moreover, the international
competitiveness of the crisis-afflicted countries will probably gradually improve in view
of falling prices. In the meantime domestic demand in those countries will continue to
decline since private debt levels remain very high and unemployment is not expected
to fall. Moreover, refinancing conditions remain tight due to the fragile position of the
banking system and are constraining investment activity. The fact that fiscal policy is
clearly becoming less restrictive is stabilising short-term domestic demand. This,
however, is weakening the forces that strengthen long-term competitiveness.
Expansive monetary policy is also boosting the economy.
All in all, gross domestic product in the euro area should have fallen by 0.5% in 2013
and looks set to increase by 0.7% in 2014. Production in the crisis-afflicted countries
(Spain and Portugal) will only increase marginally or will continue to shrink (Italy,
Greece and Cyprus). More stable economies like Germany and Austria, on the other
hand, will see an upturn. No upturn is expected in the French economy, which is
suffering from massive competitiveness problems.
Since no sweeping recovery is on sight in the crisis-afflicted countries, the
unemployment rate will remain at 12.2%, with significant regional differences. High
underemployment will further curb the rate of price increases. The impact of past
increases in consumption taxes will also gradually diminish. The rate of inflation is
therefore expected to drop to 1.4% this year, before weakening further to 1.1% next
year.
Situation of the German economy
In Germany the European debt crisis clearly put a strain on economic output at the
beginning of the year. The economic situation improved over the summer months,
partly because fresh impulses were expected from abroad. Good income perspectives
and favourable financing conditions increasingly made themselves felt. The confidence
of firms in Germany as a business location grew as a result. Consumers also became
more confident in the future. This benefitted both consumption and equipment
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investment, with the latter increasing again after a lean period of 1 ½ years. Investment
in construction continued to follow an upwards trend, which was mainly fuelled in
recent years by the flight into real assets and the uncertainty surrounding foreign
investments. Overall, domestic demand was the mainspring of the German economy
this summer.
Labour demand remained high. Thanks to a cut in short-time work, as well as a lot of
overtime worked to compensate for production losses due to bad weather, average
working time increased. At the same time, companies remained very willing to recruit
staff, leading to no change in the pace of the increase in employment subject to social
security contributions. Unemployment nevertheless rose over the year as a whole.
Sustained migratory inflows from Eastern Europe and the European crisis-afflicted
countries, as well as rising domestic labour market participation contributed to this
increase. The rise in wages over the summer was curbed by the absence of non-payscale payments; and strongly increased unit labour costs in winter 2012/13 fell slightly.
Outlook for the German economy
Overall economic production is expected to have increased by 0.3% in the last quarter
of 2013. The German economy looks set to accelerate at a rate of 0.5% in the first
quarter of 2014. This assumption is supported by a recent sharp increase in the Ifo
Business Climate Index.
Should latent uncertainty regarding potential investments in southern and western
countries in the Eurozone persist, without giving rise to turbulence in the financial
markets, as assumed in the baseline scenario, then the upswing is expected to
continue. Consumption will also benefit from the favourable trend in income. The
recovery in construction will continue. In view of rising export expectations and
favourable financing conditions investment in equipment looks set to increase. On the
basis of today’s normal production capacity utilisation rates, however, investment in
equipment will increase gradually. Higher world demand is boosting exports. However,
German exporters will become slightly less competitive than all of their main trade
partners next year. Overall, the increase in German exports this year lagged behind
world trade, which can also be linked to comparatively weak demand from the euro
area. Against this background demand for imports will also expand strongly. On
balance, no impulses supporting an increase in gross domestic product are therefore to
be expected from foreign trade.
All in all, real gross domestic product in 2013 is expected to have exceeded the 2012
average by 0.4%. It is expected to increase by 1.9% next year versus 2013. The Ifo
Institute is therefore not revising its summer assessment.
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The increase in employment figures will accelerate slightly in the wake of expanding
production in the year ahead. As the year draws to a close, shortages in several labour
market segments are emerging more strongly – especially in skilled labour – and
momentum is expected to weaken slightly. Domestic employment is expected to have
increased by a total of 230,000 persons on average in 2013. The unemployment rate is
expected to edge downwards from 6.9% to 6.8%. This is based on the assumption that
the massive constraining impact expected from the new minimum wage will not yet
take effect during the forecasting period.
Inflation will remain moderate. Lower energy prices are a curbing factor this year. Price
pressure due to labour costs will be reduced next year due to lower labour productivity.
Overall, the consumer price level will be 1.5% higher this year and in 2014.
The German state budget will once again be in the black in 2013 and the total surplus
is expected to be 0.2%. This figure will be 0.3 % next year. General government gross
debt looks set to fall considerably from 81.2 % to around 75% as a result.
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Federal Republic of Germany Key Forecast Figures
2011
Percentage change versus previous year
2012
2013a)
2014a)
b)
Private consumption
2.3
Government consumption
1.0
Gross fixed capital formation
6.9
Machinery and equipment
5.8
Buildings
7.8
Other investment
0.8
0.9
1.5
1.0
0.5
1.2
–2.1
–0.8
4.5
–4.0
–1.9
5.6
–1.4
–0.5
3.8
5.1
3.4
2.9
4.5
2.8
–0.3
0.7
1.9
Exports
8.0
3.2
0.5
5.9
Imports
7.4
1.4
1.1
6.5
Domestic demand
Gross Domestic Product
3.3
0.7
0.4
1.9
41,152
41,608
41,862
42,092
2,976
2,897
2,952
2,952
7.1
6.8
6.9
6.8
2.1
2.0
1.5
1.5
In EUR billion
–21.5
2.3
6.0
9.2
in % of GDP
–0.8
0.1
0.2
0.3
161.2
187.2
195
206
6.2
7.0
7.1
7.3
Employmentc),(1,000 persons)
Unemployment (1,000 persons)
Unemployment rate Federal Employment
Agencyd) (in %)
Consumer pricese)
(Change in % versus previous year)
General government financial balance
f)
Current account balance
in EUR billion
in % of GDP
a)
b)
c)
d)
Ifo Institute forecast. – Price-adjusted figures. –
Domestic concept. – Unemployed
as % of civilian workforce (definition according to Federal Employment Agency). –
e)
Consumer price index (2010 = 100). – f) In compliance with the European System of
Accounts (ESVG 95).
Source: Federal Statistical Office, German Bundesbank, Federal Employment Agency,
2013 and 2014 economic forecasts by the Ifo Institute.
Ifo Institute December 2013
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For a detailed presentation of the economic forecast cf. S. Henzel, W. Nierhaus,
T. O. Berg, C. Breuer, K. Carstensen, C. Grimme, O. Hülsewig, A. Hristov, N. Hristov,
M. Kleemann, W. Meister, J. Plenk, E. Wieland, A. Wolf, T. Wollmershäuser, P. Zorn:
ifo Konjunkturprognose 2013/2014 – Deutsche Konjunkturlokomotive kommt unter
Dampf, ifo Schnelldienst, im Erscheinen.
The forecast is available to consult and
group.de/prognose or can be requested
[email protected].
download at http://www.cesifoby sending an email to
Contact: Prof. Dr. Kai Carstensen ([email protected], Tel. 089/9224-1266).
About the Ifo Institute
Information and research is what the Ifo Institute has stood for ever since it was founded in January 1949. The Institute
takes the legal form of a registered association and is recognised as a charitable, non-profit organisation. Ifo is one of
Europe's leading research institutes and is also the economic research institute most frequently cited in the German
media. Thanks to a cooperation agreement, Ifo enjoys close links with the Ludwig-Maximilians-University of Munich
(LMU); and in 2002 it gained the status of an "Institute at the University of Munich". Within the CESifo Group the Ifo
Institute cooperates very closely with the Center for Economic Studies (CES) and CESifo GmbH. CESifo is also the
brand name used to cover the international activities of the entire group
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