The German economy cooled down noticeably during the summer months. The RWI is consequently forecasting a 0.8% increase in real gross domestic product (GDP) for 2012, after having still anticipated 1.1% in June. The international economic environment in particular has deteriorated. For 2013, the RWI anticipates GDP growth of only 1.0%. As a result, no further decrease of unemployment is likely to be seen.

The international economic situation suffered unexpected and dramatic deterioration in the second half of 2012. The government debt crisis in the Eurozone is having an increasingly grave impact. The RWI is expecting the global economy and especially the highly developed countries to experience only slow expansion this year and in 2013. World trade is predicted to increase by 2.4% this year and by 3.8% next year.

The German economy picked up during the first half of 2012. The upswing was driven by exports, which were stimulated by improved price competitiveness. Domestic demand, in contrast, showed a slight decline, resulting in only retained increases in imports. Whereas private and public consumption expenditures were at a higher level, investments in machinery as well as in constructions fell back during the period. During the summer months, the business cycle cooled down. In the industrial sector, new orders and production continue to show a declining trend, the international economic environment has become less favorable and business expectations are considerably more negative.

In the face of these prospects, the RWI has adjusted its GDP forecast for this year to 0.8%, after having predicted of 1.1% in June. The less favorable international environment is expected to be the main factor hampering growth during the second half of 2012. The deteriorated environment will probably impact business investments, causing a further decline. For next year, the RWI is now expecting the GDP to increase by 1.0%, following a forecast of 2.0% in June. The rate of private consumption expenditures is likely to decline as the year progresses. Corporate investments, in contrast, will probably gain momentum as sales expectations improve, and given the increasing need to replace machinery with newer models. Investments in housing are also likely to increase strongly. External trade, on the other hand, while exports rising slightly are not expected to contribute to growth.

Job expansion is fading out, barely change in inflation

Considering the only slight increase in production, job market expansion will probably slow down. Thus, employment is expected to increase by only 90,000 persons next year, compared with 275,000 this year. We predict an unemployment rate of 6.8% for both years. Inflation will probably not decrease to any considerable extent, since production costs, driven by rising wage costs, are expected to further increase and since energy costs are likely to increase in response to economic policy decisions. We expect an inflation rate of 2% for both years.

Public deficit is expected to decrease considerably over the course of this year. Due to the structure of economic growth tax revenues boost, so that the government should be able to nearly balance the budget in this and the coming year, following last year’s deficit of €20 billions.

Crisis in the Eurozone continues to hold serious risks for business cycle

Considerable risk continues to hold for growth due to the crisis in the Eurozone, which remains unresolved: The priority goal at present is to interrupt the downward spiral of deteriorating public budgets, growing solvency concerns in the banking sector and of increasingly unfavorable financing conditions for firms. The decision to use more funding from the EFSF towards bank restructuring could be an important step for that goal.

There is a concurrent need to win time in order to see the full positive impacts of consolidating public budgets and of enforced structural reforms. That is apparently the intention of the Outright Monetary Transaction program of the European Central Bank (ECB), which allows the purchase of unlimited amounts of government bonds issued by countries participating in an EFSF or ESM measure. This program raises concerns regarding the viewpoint of the economic system order and entails considerable risk, in particular for price stability in the medium term. Yet currently there appears to be no alternative, since EU and national economic policymakers are apparently able to respond only in a plodding manner to the rapidly mutating challenges. Disintegration of the Eurozone threatens if politicians do not act, and the costs would be incalculable high.

Euro government debt crisis – a growing burden on the global economy

The global business cycle cooled down in the first half of 2012. The upswing in the US and in the Asian emerging economies began to lose momentum in past months. Growth in Latin America remained halting. Output in the Eurozone continued to fall, as expected. The public debt crisis and the recession ensuing in its wake are proving to be a growing burden on the global economy, which is expected to expand at only a subdued rate this year and next year.

Fiscal policy in the developed economies will probably follow a restrictive course. Monetary policy is not likely to achieve the effects seen in the past, despite the expansive course, since the monetary transmission process continues to be disturbed. On the other hand, governments and the ECB can be expected to take initial steps towards resolving the public debt crisis and in this way avoid any deterioration of the situation. No sustainable improvement will be seen, however, and the recession will probably maintain in the Eurozone for the meantime. Yet fiscal policy is likely to become less restrictive in the coming year and initial structural reforms will show effects. Expansion of the US economy is predicted to remain sluggish, since a number of measures aimed at stimulating growth will expire by the end of the year. Crude oil and food prices are likely to rise again in all countries, resulting in weaker consumer purchasing power. The GDP of advanced economies is predicted to increase by 1.2% in this and by 1.4% in next year.

Expansion in the emerging economies picks up only slowly

Regarding the only hesitant expansion in advanced economies, the headwind hampering the business cycle in emerging countries will probably diminish only gradually. Domestic issues additionally strain some of the major economies. Since many of these economies have fairly sound public finances, some have already taken stimulating measures in response to the weakening business cycle. Moreover, central banks have also lowered base interest rates in many cases. We therefore predict a GDP expansion of 5.1% for this year and 5.8% for the coming year among emerging economies. Global economic output (calculated in terms of purchasing power parity) should increase by 3.2% in 2012 and by 3.6% in 2013, rates far below the long term average. World trade is thus likely to grow only sluggishly as well, by 2.4% and 3.8% respectively.

Published in „RWI Konjunkturberichte“, vol. 2/2012 (available only in German)

For further information, please contact:
Prof. Dr. Roland Döhrn Tel. +49 201 81 49-262, email
Dr. Torsten Schmidt Tel. +49 201 81 49-287, email
Sabine Weiler (Press Office) Tel.: +49 201 81 49-213, email

Key Data of the Forecast from September 2012
2011 to 2013

Own calculations according to information from the Federal Statistical Office, the Deutsche Bundesbank and the Federal Labor Office. - ¹Adjusted for price changes. - ²Domestic. - ³National concept. - ⁴Relating to persons in civilian employment in Germany. - ⁵Compensation of employees per employee in relation to GDP per employed person. - ⁶In the definition of national income and expenditure. - ⁷In the definition of balance of payments statistics. - ^POwn forecast.

Key Data of the International Forecast
2011 to 2013; change in comparison to previous year in %

Own calculations, based on information from the OECD, IWF, Eurostat and national statistical offices. - ¹Real. -²Goods, in prices and exchange rates from 2005. - ³Annual average.- ^pOwn forecast.