While the German economy is in a growth cycle, both production and the number of incoming orders have not yet reached the level seen prior to the financial crisis. RWI is forecasting a 3.4% increase in real gross domestic product (GDP) for 2010. The forecast, which is 1.5% higher than the forecast made in June 2010, primarily reflects the unexpectedly vigorous growth experienced during the second quarter. In general, the economy continues to expand at a moderate pace. For 2011, RWI is expecting the economy to grow by 2.2%. In addition, the institute is reckoning with a drop in the unemployment rate and a temporary increase in the rate at which public debt is growing.
Despite growth in production, the global economy has not yet recovered from the financial crisis either. With financial markets continuing to be highly volatile, the recovery has once again slowed down both in industrial nations and in emerging countries. Production levels within the global economy are predicted to increase by 3.3% this year and 2.6% next year.

On the whole, Germany is in the midst of a recovery, yet the situation is not nearly as favorable as the surprisingly vigorous increase in GDP would suggest. The German economy saw unexpectedly rapid expansion during the first six months of 2010, with the GDP reaching a level 1.7% higher than in the previous six months, when adjusted for seasonal factors. Increased rates of foreign and domestic demand (in the latter case specifically higher investments in fixed assets and buildings) as well as a rise in public consumption contributed to this growth. In addition, many businesses evidently replenished their inventories. After recently receiving impetus from the employment market, private consumption also improved. There was considerably more export activity as global trade has in the meantime made good the ground lost during the drastic decline last year. Yet the growth in GDP was additionally bolstered by a large number of special effects, including economic stimulus programs and the weather. Both production and the number of incoming orders have not yet regained the level seen prior to the financial crisis. Industrial production all but stagnated during the summer months.

Against this backdrop, RWI has refined the GDP forecast for this year to 3.4%, after predicting a 1.9% increase in June. The new forecast specifically reflects the unexpectedly vigorous increase in GDP seen in the second quarter of 2010. For next year, RWI is expecting the GDP to increase by 2.2%, following a forecast of 1.7% in June. Domestic demand is expected to expand at a moderate yet steady pace during this period. With production capacities being utilized to an increasingly greater extent and sustained low interest rates, investments in equipment can be expected to further increase. Consumer demand is also likely to contribute somewhat to growth. Expansion in the construction industry, in contrast, will probably slow down as the current investment program comes to an end and in the face of the unhealthy financial situation of municipalities. Foreign trade is expected to be a less significant factor in growth.

The situation in the employment market, meanwhile, is most likely to improve, with the number of jobless individuals dropping below the 3 million mark. The employment rate increase is seen to continue, although at a slower pace. At the same time the number of individuals working shorter hours is expected to fall below the level seen before the recession. In addition, the demographic trend will result in an increasingly reduced supply of labor, so that the unemployment rate is forecast to fall to an average of 7.7% for this year and 7.3% for the coming one.

Greater flexibility in the employment market and relatively solid budgets provided stability during the crisis

The ratio of public debt to GDP is forecast to increase from 3% to 3.9% in the course of 2010 as a result of an expansive financial policy. The situation of public finances would thus continue to worsen, albeit not as seriously as previously anticipated, as a result of the more favorable economic situation overall. If, as announced, the government begins following a budget consolidation course, the deficit rate can be expected to drop to 3.0%.

Inflation should remain moderate. While price hikes for raw materials and energy are likely to be passed on gradually to consumers, with production far short of running to capacity, only a slight margin exists in many sectors for passing on higher prices. RWI is therefore expecting only a moderate rise in inflation, to 1.1% in the current year and 1.5% in 2011.

One of the reasons that, from today’s perspective, Germany has gotten through the recession relatively unscathed in comparison to many other countries, is the key economic policy decisions of recent years. The labor market reforms are seen as playing a major role in maintaining a stable employment situation. In addition, prior to the recession public budgets were relatively healthy, so that in the wake of the slump in the business cycle Germany’s public deficits did not increase at the same alarming rate seen in other countries. Those are good reasons for continued focused efforts on more flexible employment markets and on budget consolidation.

Global economy not yet completely over the financial crisis

Although global economic production has been growing for five quarters, the financial crisis has not yet been resolved. Financial markets continue to be highly volatile, and international investors prefer secure cash investments. Global recovery recently slowed down both in the industrial nations as well as in the emerging countries, whereas the latter had played a vital role in bolstering global economic growth up to now. Specifically, China’s more restrictive economic policy has led to a slower increase in production rates.

Since mid-2009 international trade in goods has developed much more favorably than global production. This can be attributed partly to a more intensive division of labor at the international level, resulting in production changes now having a more direct impact on world trade than had previously been the case. On the other hand, the financial crisis is seen as having made it difficult to secure financing for international business transactions at times, an observation supported by the drastic decline in world trade seen last year. These financing problems could presumably be resolved, in part at least, through government guarantees extended beginning in the second quarter of 2009. It must be expected, however, that the recovery in world trade witnessed recently will be followed by a period of weaker growth. Due to the catching-up effect taking hold in 2010, real world trade in goods is expected to grow appreciably by 15%. We are expecting a 5.5% increase in 2011.

Global economic growth expected to slow down considerably

Financial policy is expected to have a restraining effect in the forecast period. In many countries, public debt increased dramatically during the recession, and it is likely to become difficult to place new securities in the financial markets. A large number of countries have responded to the situation by passing budget consolidation programs. Most countries will probably continue to pursue an expansive monetary policy, however, with inflation expected to continue at a low rate and production still running short of capacity.

To summarize, RWI is expecting the global economy to grow at a considerably slower pace than seen previously. Following a 3.3% increase during the current year, global economic production (based on the dollar) is predicted to grow by 2.6% in the coming year. While the industrial nations will probably continue to experience increased investment activities, the investment rate will remain low in long-term comparison. Consumer demand is expected to remain weak on account of high unemployment rates in many cases and due to the high level of debt among private households seen in certain countries. Economic growth will probably slow down in the emerging nations in particular as a result of the restraining effect of economic policy and due to the only sluggish increase in demand expected on the part of industrial nations, a factor expected to put pressure on the foreign trade sector, which has always been important for the emerging countries.

(published in „RWI Konjunkturberichte“, Heft 2/2010, available only in German)

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

Key Data of the Forecast for 2010 and 2011
2009 to 2011

Own calculations according to information from the Federal Statistical Office, the Deutsche Bundesbank and the Federal Labor Office; changes in relation to the previous year. - ¹Adjusted for price changes. - ²Domestic. - ³National concept. - ⁴In differentiation of the Federal Labor Office (relating to employed persons in Germany). - ⁵Compensation of employees per employee in relation to GDP per employed person. - ⁶In differentiation of national accounting. - ⁷In the definition of the balance of payments statistics. - ^pOwn forecast.

Key Data of the International Forecast 2009 tp 2011
change in comparison to previous year in %

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