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Ifo Economic Forecast 2007/2008:
Upswing at a Slower Pace
Press release
Embargoed until:
Thursday, 25 June 2007, 14.15 hrs CEST
Munich, 25 June 2007
The world economy is in the fourth year of an economic upswing and has also continued to expand robustly this year. Growth in GDP has been dynamic as a result of the
favourable profit situation of enterprises, higher stock prices and, despite the recent increases, the still comparatively low, long-term interest rates. The increase in the price of
oil has had a weak retarding effect, despite the strong, renewed rise since the beginning
of the year. The central banks of the industrialised countries have again tightened their
monetary policy since the start of 2007.
The expansion of the world economy will continue to be lively in the forecast period but
will flatten somewhat. The increase in GDP in the United States will gain in speed after
a temporary slowing. In the course of the forecast period, growth rates will rise to
slightly above the potential growth path. The upswing in the euro zone will initially
continue at a robust pace but will be somewhat less dynamic next year. The growth in
GDP in Japan will be strong initially but will then flatten gradually somewhat. Also in
the newly industrialised countries, the economic expansion will continue to be robust.
Especially in China but also in India the pace of expansion will remain high. In Latin
America and in the other countries of East Asia, the increase in output will be somewhat
more moderate but will still be robust. GDP in the industrialised countries will grow by
2.5% in 2007 and by 2.8% in 2008. World trade will expand this year by 7.5% and next
year by 8.0%. Price increases will remain moderate, also since wage hikes will not be
strong. This forecast is based on the assumption that the oil price will be about 70 dollars a barrel and that the euro will sell for about 1.35 US dollars.
In Germany, the economic upswing has continued despite the increase in the rate of
VAT at the beginning of the year. Seasonally adjusted, total economic output rose in the
first quarter at a current annual rate of 2.1%, although previously the pace of expansion
had been 4.0%. At the present time, the current National Account data make an assessment of the fundamental economic dynamics difficult. This is because of several special
factors. On the one hand, especially construction output benefited from the unusually
mild weather conditions in the first quarter of this year and partially also in the last
quarter of the past year. On the other hand, private consumption and GDP were boosted
in the fourth quarter by purchases in advance of the VAT hike and were correspondingly dampened in the first quarter. In addition, there are the irregularities in the official
statistics – the development of inventory investments and exports was distorted in the
winter half year – and in seasonal adjustment.
In total, economic output in the second quarter of 2006 grew, seasonally adjusted, over
the previous quarter at a current annual rate of 1¾% according to estimates of the Ifo
Institute. The somewhat lower growth pace in comparison to the first quarter is above
all attributable to the decline in the seasonally adjusted values for construction output.
Due to the dynamic growth in the second half of 2006, for the first half of 2007 we still
however have a strong growth rate of 3.0% over the previous year.
In the forecast period, the economic upswing will continue but will not match the robust
pace of the past year. Total economic output will expand this year by 2.6% (workingday adjusted by 2.8%). In 2008 the economic expansion will enter its advanced phase.
Capital expenditure on equipment will rise again but at a slower pace. Private consumption will expand due to the improved situation on the labour market. Total economic
output is expected to expand by 2.5%. With calendar adjustment for the larger number
of working days this will mean a growth of only 2.1%. Consumer prices will increase
by 2.1% in 2007 and by 1.8% in 2008.
In the forecast period, the continuingly high rate of capacity utilisation will boost labour
demand. The increase in employment will be primarily for full-benefit positions and for
non-state-supported self employment. In total, domestic employment will increase by
475,000 in 2007 and by 308,000 in 2008. The reduction in unemployment will progress
further under the favourable economic conditions but at a reduced pace. Unemployment
will decline by 675,000 in 2007 and by 285,000 in 2008. On average for 2007, unemployment will stand at 3.8 million and in 2008 at 3.5 million.
The budget deficit this year will be reduced by about 8 billion euros, which will be 0.3%
of nominal GDP. In 2008 a slight budget surplus of about 5 billion euros can be ex-
pected. The last budget surplus was in 1989, the last year before German reunification,
disregarding the special effect in 2000, when revenue from the auctioning of UMTS
licences (nearly 51 billion euros) led to a budget surplus of 27 billion euros. Since the
output gap will be clearly positive in 2008, the cyclically adjusted deficit rate will still
amount to nearly 1%. The task of consolidation is thus by no means complete even
though with this year’s fiscal measures (especially the increase in the rate of VAT) and
with the moderate wage increases in the public sector the cyclically adjusted budget
deficit has been lowered by a good 1.5 percentage points since 2005.
Ifo Economic Forecast 25 June 2007
Federal Republic of Germany
Key Forecast Figures
2005
Percentage change over previous year
2006
2007
2008
(1)
(1)
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)
0,1
0,6
0,8
6,1
-3,6
4,7
0,5
6,9
6,5
0,9
0,8
1,5
5,6
7,3
4,3
5,9
1,7
13,0
11,6
2,8
0,3
1,8
5,7
8,8
3,4
5,5
2,2
8,2
8,0
2,6
2,2
1,6
2,9
6,0
0,3
4,3
1,9
7,0
6,5
2,5
Employmentb) (1.000 persons)
Unemployment (1.000 persons)
38823
4861
39090
4487
39565
3812
39945
3527
11,2
10,3
8,8
8,1
2,0
1,7
2,1
1,8
-72,6
-37,0
-8,0
5,1
-3,2
-1,6
-0,3
0,2
1,5
2,7
2,8
2,6
2,2
2,2
2,1
2,0
Unemployment ratec) (in %)
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)
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.e) On national accounts definition (ESA 1995).-f) Harmonized index of consumer prices (HICP).
Source: Eurostat, Federal Statistical Office, Federal Agency of Labour, forecast by the Ifo Institute.