The RWI slightly lowered its economic growth forecasts for 2010 in comparison with December 2009 by 1.6% to 1.4%; growth of 1.6% is anticipated for 2011. In the process, the impulses are primarily coming from the external balance for the time being. Domestic demand is predicted to gain force over the course of the coming year. It may have a stabilizing effect that the labor market situation has only worsened slightly in spite of the major economic downturn and the unemployment rate is not estimated to rise sharply, even by 2011. Economic policy should scale back the measures introduced to fight the financial crisis in a controlled fashion.

The recovery of the German economy stalled around the end of 2009. After the overall economic production in the summer term had noticeably increased, it stagnated in the fourth quarter. It only expanded slightly in the first quarter of 2010, too, primarily because construction production declined significantly due to the hard winter. On the other hand, the inflow of domestic orders increased sharply in January and industrial production expanded slightly. In addition, the situation on the labor market has only declined slightly, and income should also remain relatively stable on the whole for 2010.

We expect that the revitalization of economic activity will only be hesitant for this and the coming year. Investments in all industrial are expected to remain weak, meaning that the high competitiveness in investment goods will hardly have any effect at present. Since experience shows that banks’ losses on outstanding receivables rise during the late phases of recessions, it should continue to be difficult for them to grant loans. In addition, many companies’ creditworthiness may have suffered, since they have fewer actual financial reserves as a result of the recession.

Labor market remains relatively stable

Against this background, the RWI forecasts that the gross domestic product (GDP) will only increase by about 1.4% this year on the average. At present, the impulses are mainly coming from the external balance, but investments in equipment may increase over the course of the year. Private consumption will probably not contribute greatly to expansion, since wages and pensions will hardly rise and employment will in fact continue to sink. Construction investments are estimated to drop slightly.

For 2011, the RWI anticipates an increase in GDP of 1.6% as compared to 2010, in which expansion over the course of the year should increase somewhat. Export is expected to continue to recover and investments will increase. The private consumption expenditures are only estimated to increase slightly if the labor market situation stabilizes. For the moment, the slow increase of capacity utilization will make the companies more determined to reduce their surpluses of workers. However, since the workforce potential will decrease for demographic reasons, only a moderate rise in unemployment is anticipated, to 8.3-8.5%. Inflation pressure should remain low due to low demand and the rise in prices should be moderate at 0.8-1.1%.

Economic policy should scale back its expansive course

The public budgets' situation will likely continue to worsen in 2010; the state budget deficit will rise from 75 to 125 billion euros, thus bringing the deficit ratio from 3.3% to 5.0%. The budget deficit could be cut to around 115 euros in the coming year, while the deficit ratio could drop to 4.6%.

The economic policy has contributed to alleviating the recession through its expansive course. But it cannot and should not remain on this course for long and should develop an exit strategy. Monetary policy has already begun to scale back the “unconventional measures” with which it ensured the supply of liquidity; but it can only increase its base interest rate gradually. While financial policy has announced a consolidation course, it remains to be seen when it will begin with it and how it will proceed. As of 2016, however, the debt brakes will be applied with a maximum limit of the Federation’s structural deficit of 0.35% of the GDP. The later this objective is tackled, the harder it will become to make the necessary cuts.

World economy: emerging markets have recovered more quickly than industrial countries

The world economy has livened up since last autumn. While the emerging countries’ industrial production bounced back quickly and has now reached the level of fall 2008, industrial production in the industrial countries is still 15% below its cyclical peak. Until recently, economic performance was even diminishing in countries with extraordinarily rapidly rising national debts, such as Spain, Greece and a number of eastern European countries.

The economic policy in 2009, which clearly pursued expansion, will likely be characterized by economic stimulus plans winding down and consolidation measures being initiated. But a more significant reduction of the budget deficits can only be expected in 2011. The central banks will probably reduce their “unconventional” measures first, before they will increase their base interest rates, prospectively at the end of this year or the beginning of next year.

Against this background, it is expected that the world economic situation will only improve gradually. The pace of expansion in the emerging countries may slow down somewhat, while the rebound in the industrial countries will only gain momentum very hesitantly. All in all, economic performance in the industrial countries will likely increase by about 2% during this year and the coming year. At the same time, expansion in Europe is expected to gain strength over the course of the year, while it is anticipated to subside somewhat in the USA and Japan. The world gross national product is expected to rise by approximately 2.7% in 2010 and 2011 each.

On the whole, the global economy has appeared to have overcome the recession, but it is only recovering with great restrained. Economic policy in many countries is likely to take a restrictive course more or less simultaneously. In the process, the risk presents itself on one hand of pulling out too quickly or too late, or of proceeding too rapidly or too hesitantly. On the other hand, the expansion could currently depend more on the expansive policy than it appears, meaning that the simultaneous about-face of global economic policy could lead to a renewed recession.

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