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Ifo Economic Forecast 2008/2009:
Upswing Comes to a Halt
Embargoed until:
Tuesday, 24 June 2008, 14.05 hrs CEST
Munich, 24 June 2008
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Press summary
In the wake of the US real-estate crisis and the turbulence on the international financial
markets, the dynamics of world economic activity have weakened. The survey-based Ifo
World Economic Climate worsened considerably in the second quarter of 2008, the
indicator falling to its lowest level in more than six years. The decline resulted
especially from the more unfavourable appraisals of the current economic situation, but
also the expectations for the next six months were revised downwards. The worsening
of the Ifo World Economic Climate was particularly marked in North America and
Western Europe. The strongest decline in the climate indicator, as in the previous
survey, was in the United States.
The expansion of the world economy will decelerate perceptibly in the forecast period.
The rise in GDP will slow since the apex of the economic cycle seems to have been
reached. In addition, the persisting insecurity on the financial markets, the negative
asset effects of falling house and share prices, high inflation as well as the recent strong
hikes in oil prices are having an increasingly retarding effect.
In the United States GDP growth will remain weak. Private consumption as well as
business investments will initially accelerate somewhat as a result of tax rebates and tax
allowances; it is likely that this will only be a temporary effect, however. As a reaction
to the strong rise in the aggregate price level as well as increased inflation expectations,
the Federal Reserve is expected to adopt an increasingly more restrictive monetarypolicy course in spite of the weak cyclical development during the forecast period.
In the euro area, the increase in GDP will flatten out. Consumption will expand at only
a restrained pace despite the favourable situation on the labour market. Investments will
clearly lose momentum, since the apex in the investment cycle seems to have been
passed. Also exports will not contribute any appreciable growth impulses.
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Growth in Asian countries will be dampened by inflationary developments, especially
for food and raw materials. In China expansion will weaken somewhat due to
worsening conditions in the world economy and a more restrictive monetary-policy
course. A counterforce will be the increase in demand of private households. In India
increasing interest rates will negatively affect the investment propensity of firms but
also growth in private consumption demand.
The German economy experienced a vigorous start into the new year. According to
available official statistics, aggregate production increased in the first quarter of 2008,
seasonally and calendar adjusted, by 1.5 percent over the previous quarter. Business
activity was remarkably robust into the spring months in contrast to significant
worsening of various external positions – including the weaker growth of important
markets, the noticeable appreciation of the euro vis-à-vis the currencies of important
trading partners as well as the soaring prices for oil and other industrial raw materials.
After the strong expansion of aggregate output in the first quarter of 2008, a slight
decrease in real GDP is expected for the second quarter. On average for the first half of
2008, this results in GDP growth of 1.5% in comparison to the second half of 2007,
seasonally and calendar adjusted; in comparison to the previous year, growth amounts
to 2.7%.
In the further course of 2008, aggregate output should increase again somewhat; growth
dynamics will remain comparably weak, however. Dampening factors are becoming
particularly noticeable for the German economy. The cooling of world economic
activity will dampen foreign sales; the stronger euro is an additional retarding factor.
The high costs for energy will limit the increase in company profits and reduce the
financial scope for new investments. At the same time this will limit the spending
discretion of private households, which will restrict consumption. All in all, aggregate
output on average for 2008 will expand by 2.4 %; calendar adjusted by 2.1%.
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After having reached the apex of the cycle this year, the economic forces will weaken
noticeably next year, investments in plant and equipment will hardly show any
expansion and stimulus from foreign sales will become increasingly weaker. Private
consumption will show some growth in the wake of lagging labour market
developments, but over the course of the whole previous cycle, this component was not
able to unfold any significant economic dynamics. All in all, real GDP will grow by
1.0% in 2009; calendar adjusted growth will be of a similar order of magnitude. With an
estimated potential growth rate of 1½%, the aggregate output gap will decrease by ½
percentage point. The consumer price level will increase on average for 2008 by 3.1%;
in 2009 – after the price increase for food and energy have been digested – by 2.4%.
Average employment for 2008 will increase by 590,000, which for the course of the
year corresponds to an increase of 430,000. In 2009, demand for workers will be
reduced because of the weakening economic dynamics. In addition, real wages will also
increase somewhat. The number of gainfully employed will expand by only an average
of 110,000, which corresponds to an increase of only 20,000 for the course of the year.
The number of unemployed in 2008 will largely reflect the employment numbers,
falling 515,000 to nearly 3.3 million (unemployment rate: 7.5%). In 2009, the reduction
in unemployment will be far more restrained, standing at below 3.1 million on average
for the year. This would mean an unemployment rate of 7.1%. This assumes, however,
that the potentially economically active population will again decline perceptibly.
Ifo Economic Forecast (24 June 2008)
Federal Republic of Germany
Key Forecast Figures
2006
2007
2008
2009
(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)
b)
Employment (1.000 persons)
Unemployment (1.000 persons)
c)
Unemployment rate (in %)
1,0
0,9
6,1
8,3
4,3
6,7
1,9
12,5
11,2
2,9
-0,4
2,2
5,0
8,2
2,3
6,6
1,0
7,8
4,8
2,5
0,5
1,6
4,1
7,4
1,7
2,1
1,6
7,0
5,9
2,4
0,8
1,8
0,8
0,8
0,8
1,7
0,6
4,1
3,6
1,0
39088
4487
39765
3776
40347
3261
40455
3077
10,3
8,7
7,5
7,1
1,6
2,3
3,1
2,4
-37,3
3,3
-2,6
0,4
-1,6
0,1
-0,1
0,0
2,8
2,6
2,0
1,5
2,2
2,1
3,6
2,7
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 (2005=100).e) On national accounts definition (ESA 1995).-f) Harmonized index of consumer prices (HICP, 2005=100).
Source: Eurostat, Federal Statistical Office, Federal Agency of Labour, forecast by the Ifo Institute.