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Ifo Economic Forecast
2012/2013:
Increased Uncertainty Continues to Curb
German Economy
Press release
Embargo:
Thursday 28 June 2012, 8.45 a.m. MEZ
Munich, 28 June 2012
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Ifo Economic Forecast 2012/2013:
Increased Uncertainty Continues to Curb German Economy
The German economy is expected to experience a weak phase in the second half of
2012. This is prefigured by the Ifo Business Climate, which deteriorated noticeably
in May and June due to prolonged uncertainty regarding the development of the
European debt crisis. Real gross domestic product - at a 67% uncertainty interval
of 0.1% to 1.3% - should therefore only increase by 0.7% on annual average in
2012. Boosted by domestic demand, the economy should regain momentum next
year as long as the European debt crisis does not escalate massively. Employment
should continue to rise over the entire period.
Since last summer the world economy has been in the grip of an economic slowdown
that has affected all key regions, albeit to differing degrees. This was reflected in a
slump in many confidence indicators over the course of last autumn. Although the mood
of consumers and producers recovered briefly for a short time at the beginning of this
year, it nevertheless remains at a far lower level than in spring 2011, and has resumed a
downward trend in some places.
In addition to highly restrictive economic policy in a large number of emerging economies up until summer 2011 and the clearly restrictive financial policy implemented in
many European countries, the decisive factor in the weakening of the global economy
was primarily great uncertainty due to the renewed escalation of the European debt crisis. Far-reaching economic policy interventions in the Eurozone initially calmed the
situation. The European Central Bank (ECB) massively extended its unconventional
measures. Additional fiscal consolidation measures were also implemented in many
Eurozone countries and decisions were taken to accelerate structural reforms in order to
restore investor confidence. The so called "sixpack" was also introduced to reform the
European Stability and Growth Pact. Finally, a fiscal pact was agreed upon that provides for the anchoring of debt ceilings in the national legal systems of European countries and Greece was given a successful 'haircut'.
However, these economic policy measures only calmed the situation temporarily since
the underlying structural problems remained unresolved. Risk premiums on the government bonds of crisis countries in the Eurozone started to rise again as early as April
2012. Uncertainty increased in all key financial markets, pulling share prices down
worldwide. This renewed escalation was primarily triggered by disconcerting signals
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coming from Greece and Spain. In the run up to the parliamentary elections in Greece in
May, survey results suggested that it would be very difficult to form a government that
would be willing and able to continue with the austerity and reform programme agreed
upon with the troika. Furthermore, the deepening of the recession in Spain led to a large
increase in the number of distressed loans and accelerated the decline in real-estate prices; both of which placed additional burdens on the balance sheets of the already battered
Spanish banks. This shattered confidence in the solvency of Spanish credit institutions,
which accelerated the flight of foreign capital from the Spanish banking system. The
markets were also unsettled by multiple signs that the consolidation efforts of Spanish
financial policy and the reforming zeal of Italian politics were beginning to wane.
The baseline scenario of this forecast is based on the assumption that the European debt
crisis would not escalate dramatically even if Greece were to leave the currency union.
On the one hand, this presupposes that it will be possible to mitigate the negative effects
of any financial market turbulence that flares up quickly by taking appropriate economic
policy measures. Such measures specifically include the provision of sufficient liquidity
to solvent banks, as well as the recapitalisation or handling of troubled credit institutions
in a way that protects the banking system. On the other hand, this assumption presupposes that the Eurozone countries document in word and deed that they are willing and
able to continue to stick by previously announced reform and savings measures or even,
if necessary, to further intensify fiscal consolidation to avoid fully losing investor confidence. Under these conditions the consequences of Greece's potential insolvency within
or outside the currency unions should remain limited and should not lead to the contagion of any other member states.
An escalation of the European debt crisis nevertheless remains the main risk to global
economic development. The probability of a risk scenario coming to pass currently
seems just as great as that of the baseline scenario. For the structural problems to be
tackled by the Eurozone's crisis countries (Greece, Ireland, Portugal, Spain and Italy)
remain enormous and will negatively impact their performance, and thus their solvency,
far beyond the forecasting period. Ireland and Spain in particular are suffering from the
consequences of the burst real-estate bubble: private households are heavily in debt and
banks are poorly capitalised or even insolvent. Moreover, in addition to unsound public
finances, most crisis countries are running high current account deficits and have high
net external debts. To make these debts sustainable, it will be necessary to transition
from the current high deficits to high surpluses in trade and services balances. However,
the successful implementation of this adjustment process requires a reallocation of production factors in favour of tradable goods, as well as a clear improvement in price
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competitiveness. With the exception of Ireland, the adjustments of the relative international competitive pricing position of crisis countries undertaken to date can be deemed
insufficient.
Another potential hot spot is the Spanish banking sector, whose problems have intensified over the course of the recession. The number of dubious loans on bank balance
sheets and the flight of foreign capital have accelerated. The equity position of many
banks has deteriorated significantly accordingly, calling into question their ability to
survive without public support. In response, the government in Madrid is planning to
tap the European bail-out package. However, it is uncertain whether the targeted volume
of 100 billion euros will be sufficient to recapitalize Spain's problem banks.
Under the assumptions of the baseline scenario, the world economy should gradually
recover during the rest of the forecasting period, after a weak phase in the first three
quarters of this year. This is due to the increasing pace of expansion in the emerging
economies of Asia, and to a somewhat lesser degree, of Latin America. As a reaction to
the economic cool-down in the second half of 2011, monetary and fiscal policy was
loosened in many of these countries, which should boost domestic demand. Moreover,
real disposable income in most emerging economies looks set to rise fast. In industrialized countries, on the other hand, the pace of economic growth will be much slower. In
spite of extremely expansive monetary policy everywhere, developments should differ
dramatically. The Eurozone should experience a recession this year, followed by stagnation in 2013. In the USA, on the other hand, the economic recovery, which may be less
dynamic than in previous recovery phases, is set to continue and slightly gather pace.
All in all, total economic output in the world should increase only weakly during both
this and next year by 3.2% and 3.6% respectively. Accordingly, world trade is set to
expand by just 3.5% in 2012 and by 5.2% in 2013.
In Germany total economic output increased noticeably in the first quarter of 2012 at a
rate of 0.5% versus the previous quarter. Positive impulses primarily came from international trade. Another positive factor domestically was that private consumption has
clearly picked up again after falling slightly in the fourth quarter of 2011. Investments,
on the other hand, have fallen considerably. Against this background, the situation in the
labour market has continued to improve. The seasonally adjusted number of persons in
employment increased by 192,000 in the first quarter of 2012, boosted by the expansion
of employment subject to social security contributions. Inversely, unemployment fell.
The German economy looks set to go through a weak phase during the summer halfyear of 2012. This is what the Ifo Business Climate would seem to indicate, which
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clouded over considerably in May and June. Prolonged uncertainty regarding the development of the debt crisis, the ups and downs of the financial markets, as well as concerns over an economic slowdown on the part of key trade partners are curbing real
economic development. All in all, gross domestic should only increase by 0.1% in the
second and third quarters of 2012 respectively.
Towards the end of the year, however, upward economic forces should prevail and
overcome the wait-and-see attitude triggered by planning uncertainty. For overall conditions remain favourable for the German economy, with ECB monetary policy continuing to provide a stimulus domestically. Moreover, the clear preference shown by international investors for investments in Germany is keeping the interest level for private
and public borrowers low. The preceding devaluation of the euro also provides momentum for exports to countries outside the Eurozone. Total economic output therefore
looks set to increase by 0.3% in the fourth quarter. Overall, real gross domestic product
should increase by 0.7% on annual average in 2012.
Total economic output should gain momentum next year, driven by domestic demand.
Private consumption should increase by 1.5% accordingly, boosted by sustained growth
in real disposable income and the positive situation in the labour market. Gross fixed
capital formation also looks set to increase considerably, boosted by financial conditions, which will remain very favourable, and the realisation of projects postponed in
2012. The external sector, however, should make a negative contribution to growth.
Overall, real gross domestic product should increase by 1.3% in 2013.
Against this background, employment will continue to increase and should be 610,000
persons higher in 2012 than in 2011. However, the number of unemployed will not fall
by this figure due to the increasing labour supply created by migration from the EU and
the "hidden reserve". Unemployment is estimated to drop by 110,000 persons in 2012
and by 50,000 in 2013, when the unemployment rate should be 6.6%.
Inflation looks set to remain strong. Although no major fresh upward pressure on prices
is expected from crude oil prices, domestic pressure looks set to increase. Overall, consumer prices are expected to increase by 2% in 2012 and 2013 respectively. Adjusted
for the influence of fuel prices, inflation should rise from 1.6% in 2012 to 2.2% in 2013.
The total budget deficit should be reduced to 0.3% of nominal gross domestic product
this year, and Germany should even be able to balance its budget next year.
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The uncertainty surrounding forecasts is very high at the moment. More specifically, the
economy depends far more heavily on political decisions than usual, which are difficult
to predict. A forecasting interval can nevertheless be calculated, which covers the rate
of change of gross domestic product with a probability of around two thirds; for this
point forecast of 0.7% the interval extends from 0.1% to 1.3%. However, caution is
called for with this interpretation since the impact of massive upheavals such as the
chaotic exit of countries from the Eurozone is impossible to quantify statistically.
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Ifo Economic Forecast 28 June 2012
Federal Republic of Germany
Key Forecast Figures
2010
2011
2012
2013
(1)
(1)
Percentage change over previous yeara)
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)
0,6
1,7
5,5
10,5
2,2
4,7
2,4
13,7
11,7
3,7
1,4
1,1
6,4
7,6
5,8
4,8
2,5
8,2
7,8
3,0
1,3
1,4
0,8
-1,6
2,5
1,3
0,7
2,5
2,5
0,7
1,5
1,1
4,2
4,9
3,7
3,8
2,1
3,2
5,1
1,3
Employmentb) (1.000 persons)
Unemployment (1.000 persons)
40553
3238
41096
2976
41570
2866
41706
2816
7,7
7,1
6,7
6,6
1,1
2,3
2,0
2,0
-106,0
-25,6
-9,2
0,6
-4,3
-1,0
-0,3
0,0
2,0
1,5
-0,5
0,0
1,6
2,7
2,2
1,6
Unemployment ratec) (in %)
Consumer prices
d)
(% change on the previous year)
General government financial balance
- EUR billion
- in % of GDP
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 of the ifo Institute.
c) Federal Employment Agency concept.- 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 Employment Agency, forecast of the Ifo Institute.