RWI increased its economic growth forecast for Germany from 0.6% to 1.0% in 2012 compared with December 2011; growth of 2.0% is anticipated for 2013. In the face of weakened demand among European trade partners and the uncertainty among businesses resulting from the government debt crisis in Europe, the GDP is expected to rise little during the first half of the year, while the upswing should gain momentum afterwards. Unemployment and inflation are then expected to decline, and the condition of public budgets will probably improve slightly. The global business cycle is also expected to recover. The most recent rise in the RWI/ISL Container Throughput Index in February indicates that international trade in goods is currently increasing vigorously.

The German economy cooled down noticeably over the course of 2011. Growth slowed down for the most part in response to the deteriorating international economic environment, whereas domestic spending all but stagnated most recently. Yet Germany appears to be going through only a temporary slump. This is indicated by the fact that the most recent decrease in production was largely limited to the manufacturing sector, while production in the service sector continue to expand almost unhindered. Industrial production is expected to pick up again, since world trade appears to be vigorously expanding once more and the business climate has improved. This is additionally supported by the unbroken increase in the numbers hired.

Economic growth is expected to recover during the forecast period of 2012-2013. Burdening factors, such as weak demand among European trade partners and the uncertainty among businesses resulting from the government debt crisis in Europe, are expected to prevail initially. As a result, the gross domestic product (GDP) will probably increase only slightly during the first half of the year. Yet export activity should gain momentum as the international economic environment continues to improve. The internal forces driving growth are also still intact. The available income of private households is expected to increase substantially, as employment continues to expand and much higher pay hikes are seen than in recent years. This should have a positive impact on private consumer spending and on investments in residential construction, with the latter additionally benefiting from low interest rates. All things considered, RWI expects GDP to increase by an average of 1.0% in the course of 2012. As capacities are utilized to an increasingly greater extent in the coming year, the recovery will probably come to bear on investments in equipment and on commercial construction as well. In addition, with a more dynamic global economy, foreign trade should make a stronger contribution to growth. In the face of these factors, GDP is likely to increase by 2.0%.

Unemployment rate and inflation rate likely to fall

Job market expansion is expected to slow down somewhat this year. The number of persons in employment will probably increase by 290,000 in the course of this year and by another 340,000 next year. A portion of the increase is likely to be accounted for by the hidden labor reserve. This category includes individuals who are willing to accept employment under certain conditions but are not registered with the public employment service, such as self-employed persons, housewives, secondary and university students and pensioners. As a result, unemployment will decrease disproportionately (i.e. by 175,000 and 250,000 in the course of 2012 and 2013). The average unemployment rates will be 6.6% in 2012 and 6.1% in 2013.

The inflation rate is predicted to fall with the dwindling impact of the recent rise in commodity prices on the overall price level. At the same time, core inflation – i.e. the inflation rate excluding food and energy prices – is likely to increase as a result of a continued rise in unit labor costs and of the extensive amount of liquidity stemming from the current expansionary monetary policy. RWI forecasts an inflation rate of 2.2% this year and 1.9% next year, with price hikes reaching levels above the average seen since the beginning of the monetary union.

The condition of public budgets will probably also improve slightly during the forecast period. The government budget debt is expected to decrease in the course of this year from 25 to 17 billion euros (equal to 1.0% and 0.7% of GDP respectively). A deficit decrease to a level of 8 billion euros or 0.3% of GDP is forecast for next year.

World economy: Grounds for optimism despite difficult financial markets

International economic growth had cooled off considerably by the end of 2011. The exacerbation of the government debt crisis within the eurozone in particular has had repercussions for other areas of the world as well. Yet the situation varies considerably among the individual areas of the globe: production fell in the majority of European countries during the final quarter of 2011. In nations where the government debt crisis led to the imposition of drastic consolidation and restructuring programs, production virtually collapsed. In the US, in contrast, the economic upswing has continued to gain momentum until recently, while industrial production among Asian countries further increased to a considerable extent. Growth among the important countries of Latin America slowed down during the second half of 2011.

While the situation in the financial markets continues to be difficult, there are signs of markets calming, giving rise to optimism. A number of factors indicate that global economic activity has been recovering again since November 2011. Specifically, the RWI/ISL Container Throughput Index rose again in February, indicating that international trade in goods is currently increasing vigorously. The seasonally adjusted value of the index rose to 111.9, following a level of 111.2 in January. The index has consequently risen by 4% since November 2011. The index is compiled using data collected by the Institute of Shipping Economics and Logistics (ISL) on an ongoing basis from 72 international ports, responsible for handling about 60% of world container throughput. Since international trade is largely carried out with seagoing vessels, figures on container throughput allow reliable conclusions to be made about changes in world trade activity.

Dampened expansion among advanced economies

Burdening factors, on the other hand, are also becoming more predominant. Specifically, crude oil has become significantly more costly in recent months, probably as a result of rising tension with Iran in particular. Driven by rising commodity prices, inflation has not fallen any further at the current margin. Nonetheless, the central banks of the advanced economies will probably not change the direction of their monetary policies in light of continued challenges in the financial sector and unutilized capacities. Financial policy will probably have a dampening effect on economic growth and remain restrictive in thrust, in the face of the high level of government debt prevalent in many countries.

As a result, expansion among advanced economies is expected to remain sluggish during the forecast period. An initial drop in economic performance is expected for countries succeeding in consolidating their public budget. Only the US recovery is likely to have increasing impact on other regions. While remaining strong, expansion in emerging countries will probably take place at a lower rate than seen previously. These countries will consequently provide a reduced impetus for international economic growth.

In sum, global economic production should increase by 3.3% in 2012 after 3.8% in 2011 (calculated in terms of buying power parity). Further recovery can be expected for 2013, considering that the restrictive impact of financial policy will probably become weaker. Still, at a predicted 3.7%, the increase in global economic production will remain below the longterm average.

Business cycle growth risks remain despite improved outlook

An improved outlook for the global economy and slightly reduced tension in the financial markets were the factors leading RWI to increase its forecast for 2012 in comparison with December 2011. Yet economic growth continues to face major risks: the situation in the financial markets is unstable. In addition, the expansionary monetary policy has led to a higher risk of inflation. In this context it appears especially risky to have allowed individual central banks to decide themselves the form of collateral that banks in their countries are required to deposit as part of refinancing. This move has violated the principle of a uniform monetary policy within one monetary union.

The government debt crisis in the eurozone continues to generate risks. Efforts toward identifying a solution are focused on two potential areas of activity: first, improved overall conditions for solid government finances; and second, enhanced options for responding to any acute challenge to refinancing governments. Advances have been achieved in this regard, by adopting more stringent rules for cases of inordinate level of debt, by enshrining a brake on spending in national constitutions, and by founding the ESM. It remains to be seen whether these measures will prove adequate and whether governments will in fact adhere to the new rules. The previously incurred levels of government debt are considerable and refinancing is not secured, even once reforms are implemented. A European redemption fund, as put forward by the German Council of Economic Experts, could allow debt to be reduced in an orderly manner.

(published in „RWI Konjunkturberichte“, Heft 1/2012 (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 March 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.