The economy in Germany has slowed noticeably during the course of 2008. RWI Essen is forecasting growth in real gross domestic product (GDP) to come to 1.7% for 2008. In so doing, RWI Essen has lowered its June 2008 forecast by 0.5 percentage points. This slack business period will presumably continue through the second half of the year. Looking into the coming year, RWI Essen is anticipating only 0.7% in GDP growth. Moreover, the institute expects the inflation rate to ease back from its July 2008 high and that a weaker labor market will prevail during the forecasting period.
At the global level, weak growth will prevail through the second half of the year but, in our opinion, a general collapse is not to be expected. However, the risks have become larger because of the turmoil in the financial markets. Instead of stimulus programs, we are calling for economic policies in Germany that will strengthen the growth forces.

Business activity in Germany has cooled markedly in the course of the year 2008. Both industrial production and construction activity have declined since January. RWI Essen is expecting this weakness to continue during the second half of the year, accompanied by a downturn in Gross Domestic Product (GDP). However, that downturn should not be overly severe since order books are still full and the labor market is robust.

Working against this background, RWI Essen is projecting real GDP expansion of 1.7% for 2008 and thus is lowering its growth forecast by 0.5 percentage points. The only factors acting to cushion the decline are the large overhang at the end of 2007 and the extremely strong expansion in the first quarter of 2008. The institute forecasts a decline of GDP in the second half of the year. Expenditures for personal consumption will probably fall off slightly, capital outlays for machinery and equipment more significantly. Expansion will probably pick up speed once again in the coming year but, even so, GDP will rise by only 0.7% over the course of the year. Thus RWI Essen is lowering its forecast for 2009 by 0.8 percentage points in comparison with the projection issued in June of this year. Given a situation characterized by gradual improvement in the global economy and Germany's increasing price competitiveness, exports will probably be the driving force behind the revival. RWI calculates that the inflation rate next year - after 3.0% this year - will come down to 2.3%. That may trigger a slight increase in spending for personal consumption. The utilization rates for manufacturing capacities will rise and that will help to gradually overcome the decline in gross fixed capital formation.

The situation in the German labor market will presumably worsen due to the soft economy. RWI Essen is assuming that employment will decline as of the turn of the year. Given the low unemployment rate at the beginning of 2009, however, the annual average should even be slightly below the current year's figure (7.4% as compared with 7.5%).

In spite of the production slow-down and a more expansive fiscal stance in this year, RWI Essen is anticipating nearly balanced national budgets in 2008 and 2009. It is true that, on the one hand, public disbursements may well rise faster than in the past. On the other hand, however, the increase will be offset by higher revenues. This is because significant wage increases are pushing workers into higher tax brackets.

The weakness in business activity is, in the opinion of RWI Essen, due above all to a gloomy world economy. Here, the risk of a sharper downturn has increased due to the latest developments in the financial markets. Sharp increases in demand for energy and food in the emerging markets have pushed up world market prices; thus relative prices have shifted to Germany's disadvantage. In this situation, however, an economic stimulus program would have much the same effect as subsidizing those goods whose prices have risen. It is more likely that such efforts would be harmful over the medium and long terms. Far more sensible would be economic policies that strengthen the forces driving growth.

The international economy remains weak but will not collapse

International business activity continued to cool down in the first half of 2008. Apparently the turbulence on the financial markets, the decline in real estate prices in the USA and other countries, and the rise in the prices for energy, raw materials and foods are felt increasingly in many countries. Accordingly, global product will probably have risen only by 3.8% in the second quarter. This is the smallest rise since 2003 and has become evident in every region.

The declines of the leading indicators would suggest that the weakness in global expansion will continue in the second half of the year. RWI Essen is, however, not anticipating a generalized collapse, because, in addition to the expansive monetary and fiscal policies in many countries, there are no signs of contraction in the USA hitherto. Furthermore, the economies in the emerging markets are still growing considerably, even though more slowly, and will probably not slip into recession. On the other hand, price pressures are being felt in the domestic markets in many countries. Thus the inflation rate will remain high for the time being and will continue to put a strain on real incomes.

It is against this background that RWI Essen expects total economic output around the world to expand next year hesitantly at first and then more vigorously. As regards the USA, the institute is assuming that the decline in spending for residential construction will come to an end and that other investment activity will gain strength. GDP in the US may well grow by 1.9% this year and 1.7% next year. The Euro area exports may become stronger again in the course of 2009. This is because the euro has, in the meantime, weakened considerably against the US dollar. Real incomes will presumably rise again as inflation cools off. The economy in the Euro area is forecasted to expand by 1.3% this year and 0.9% next year.

(Published in RWI : Konjunkturberichte, Volume 2/2008, available only in German)

For further information, please contact:
Dr. Roland Döhrn, Phone: +49 201 8149-262, e-mail
Sabine Weiler (RWI Press Office), Phone: +49 201 8149-213, e-mail