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Ifo Economic Forecast 2006/2007:
The Upswing Continues
Press release
Embargoed until:
Thursday, 29 June 2006, 14.15 hours CEST
Munich, 29 June 2006
The world economy is experiencing a robust upswing. The world economic climate,
monitored by the Ifo World Economic Survey, improved in spring 2006 for the third
time in succession and is clearly above its long-term average. The recent rise in the climate indicator was due to improved assessments of the general economic situation,
which have now reached a five-year high. The expectations for the next six months continue to be optimistic.
The expansion of the world economy will continue to be lively in the forecast period but
will flatten gradually. It will be particularly stimulated by corporate earnings that still
remain favourable despite slightly higher long-term interest rates. Although monetary
policy will continue to tighten, its effect will not be restrictive. The forecast is based on
the assumption that the price of oil will hover at 65 US dollars per barrel and that the
euro exchange rate will lie at about 1.25 US dollars. In the United States, growth in
GDP will slow slightly but remain robust and in line with its trend growth. The expansion in consumer spending will weaken somewhat since the savings rate will gradually
increase in line with slower growth in real-estate prices. In Japan the economy will remain in full swing. Also in the emerging economies, economic growth will continue to
be lively. In China GDP will continue to expand strongly. In the remaining countries of
the area, economic expansion will accelerate, which will also be the case for Latin
America. In the euro area, GDP will increase perceptibly. Consumption could expand
with an improved labour market situation. Investments will increase noticeably. In total,
world GDP will increase by about 5% in 2006 before slowing slightly to 4½% in 2007.
World trade will expand this year by 9% and next year by 7½%.
The economic situation in Germany is positive in mid-2006. The high level of the Ifo
Business Climate Index indicates that the upswing of the German economy has become
broad-based. In addition to the high-speed export locomotive, the domestic economic
situation is also improving. Equipment investment has expanded; the recent Ifo Business Survey indicates that not only firms participating in the export boom are investing
but now also domestically oriented enterprises. Even private consumption has picked
up, after the decline in the last quarter of 2005. Additional impulses will come in the
second half of the year from purchases made before the increase in VAT takes effect in
January next year. On the whole, real GDP will expand this year by around 1.8%, or by
2% after adjusting for the lower number of working days in comparison to 2005.
In the coming year, economic activity will be considerably dampened by the massive
increase of taxes and fees, but the upswing will continue nonetheless. This expectation
is based to a large part on the endogenous economic dynamics of the German economy.
After a “classical” downturn in the first years of this decade, which was accompanied
by a decline in the trend growth rate, the lower turning point was reached in the course
of 2004 both for aggregate output and for equipment spending. Since then the German
economy has experienced an economic upswing that further intensified at the beginning
this year. According to the analyses of the Ifo Institute, such an upswing lasts about four
years, as a rule. For this reason the endogenous growth forces, which will be accompanied by strong export growth, should be strong enough to prevent the dampening effects
of the planned fiscal policy measures from halting the upswing.
The investment growth in equipment and commercial construction will not weaken next
year. Also the total number of man-hours worked will increase slightly. In addition the
negative effect of the value-added tax increase on consumption might not be as great as
many fear. Due to high government deficits, many have expected an increase in taxes
for some time, which contributed to weakening consumption and the rise of the savings
rate in recent years. By means of the tax increase itself, permanent income and consumption have fallen less than measured, current disposable income. For all these reasons private consumption need not fall despite the VAT increase and other measures to
boost government revenue. Overall, real GDP will increase in 2007 by 1.7%, or, after
calendar adjustments, by 1.8%. At a potential growth rate of 1¼%, the output gap that
has existed since 2003 will be closed in the forecast period. Consumer prices will increase by an average of 1.8% in 2006. Next year inflation will stand at 2.5% as a result
of the measures introduced by the Federal Government
For the first time since 2001, Germany will fulfil the Maastricht criteria for the budget
deficit. At 61 billion euro or 2.7% of nominal GDP, a safety margin of approximately 8
billion euro will remain under the 3% ceiling. In 2007 the deficit rate will fall, in our
estimate, to 1.8% of GDP, but the state is still far from achieving a balanced budget, a
goal that should be met in times of good economic activity.
In the labour market, the situation will brighten gradually. The number of gainfully employed will increase by an average of 70,000 in 2006. In the course of the coming year,
employment will increase at a somewhat slower pace; due to the overhang, however, on
average for 2007, the number of gainfully employed will increase at a faster pace,
namely by 180,000. About half of this growth will be for jobs subject to social insurance contributions. Also the number of self-employed persons will continue to increase;
despite the only slight expansion of government assistance, it will increase by around
70,000. The number of registered unemployed persons will decline by an average of
260,000 in 2006 and next year by around 150,000.
Federal Republic of Germany
Key Forecast Figures
2004
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 %)
2005
2006
2007
(1)
(1)
a)
0,6
-1,6
-0,2
2,6
-2,3
1,8
0,6
9,3
7,0
1,6
0,2
0,1
-0,2
4,0
-3,4
1,8
0,4
6,3
5,3
1,0
0,9
0,2
3,0
5,5
1,0
4,5
1,1
9,6
8,9
1,8
0,1
0,3
3,6
6,5
1,2
5,5
1,0
7,7
6,8
1,7
38868
4381
38783
4861
38832
4601
39007
4451
10,2
11,2
10,6
10,3
1,6
2,0
1,8
2,5
-81,2
-74,5
-61,1
-43,3
-3,7
-3,3
-2,7
-1,8
2,1
1,3
2,2
2,1
2,1
2,2
2,3
2,2
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.