For 2012 RWI expects the real gross domestic product (GDP) to increase by only 0.6% following 3.0% growth during the current year. With this forecast, the institute is expressing more skepticism than for the September outlook, when an increase of 1% was still being predicted. The main cause of the worsened expectations is the continued deterioration of conditions in the international economic environment. A continuing upward trend in domestic demand will have a stabilizing effect. The situation on the labor market is not expected to worsen in the coming year, with the unemployment rate even falling slightly. The condition of public budgets is likely to improve only little. The forecast is, however, based on the assumption that the crisis gripping government budgets within the eurozone does not further escalate.

International business activity cooled off considerably in the course of 2011. The German economy has in the meantime also felt the impact. Net exports, which up until the spring had been a major factor in recovery, have since contributed little to growth. Domestic demand, in contrast, has continued to be vigorous. Capital investments in particular have shown dynamic growth up to now. An upward trend, albeit subject to much volatility, was seen for consumer spending as well. Investment in construction was marked by activity picking up unusually early in the spring, resulting in a considerable increase during the first quarter when figures are adjusted for seasonal variation. Afterwards there was a slight drop in building investments, which nonetheless carried on at a very high level.

Early indicators are pointing to stagnation in aggregate production for the six-month winter period. The minor recession within the eurozone and increasingly feeble growth among the emerging nations will probably continue to have a dampening effect on any growth in exports. Experience has shown less favorable export prospects to impact investment activity, particularly as financing conditions for businesses are expected to deteriorate somewhat due to continued pressure on the banking sector to adapt to the altered situation. At the same time, the future investment program adopted as part of Germany’s second economic stimulus package is due to expire, a factor expected to discourage investment in construction. Interest rates are expected to remain low, however, and production capacities will probably continue to be utilized at a level above the long-term average, so that there is little likelihood of a slump in investments.

GDP expected to increase by only 0.6% in 2012

Private consumption expenditures, in contrast, should continue to follow an upward trend. The job market situation has been improving up to most recently, with the number of job openings continuing to increase. In addition, the wage agreements reached up to now suggest a slight rise in real salaries and wages. As certain industries are suffering from a shortage of skilled labor, these sectors are likely to continue to offer even more fringe benefits, which will probably contribute to a further increase in wage drift. All these factors combined will result in a considerable increase in gross wages and salaries. In contrast to 2011, transfer income will also increase, as pension benefits are likely to see a major hike in response to the large increase in wages and salaries seen in 2011.

A gross domestic product of 3% is expected on the average for 2011. The business cycle will pick up again somewhat as 2012 progresses. One contributing factor will be the international environment, which is expected to brighten gradually. However, the gross domestic product is expected to increase at an annual average of only 0.6% in 2012. The major factors spurring growth will be the unbroken increase in consumer demand, both on the part of private households and the public sector. Investment activity is likely to become more vigorous only in the second half of the year. Foreign trade, on the other hand, will probably not contribute to growth at all.

Job market should remain stable in 2012 as inflation decreases

Despite the anticipated slump, the labor market situation is not expected to deteriorate. Similar to the recession already seen in 2088-2009, businesses will probably attempt to compensate fluctuating production levels through shorter working hours or by taking advantage of the leeway offered by flexible working conditions. Consequently, the employment level is not likely to drop even though a decline in the number of working hours per employee is expected. The potential number of persons in employment is decreasing due to demographic trends, so that unemployment should decline even more. We anticipate a slight decrease in the unemployment rate, falling to 6.8% for the year on average after 7.1% in 2011.

In the face of flailing growth at the global level, prices both in the commodity and goods markets should not increase as swiftly, reducing inflation pressure from this source. Prices will continue to surge in the domestic economy, however, especially since unit labor costs, buoyed by rapidly rising collective agreement wage levels, are expected to increase more sharply. On the other hand, as demand slows down it will be less possible for businesses to pass costs on to consumers. The inflation will probably decrease in 2012 on the whole, with a rate of 1.7% for the year on average.

Condition of public budgets will improve only little

The condition of public budgets will probably improve slightly. We anticipate a 0.2% decrease in the deficit rate, dropping to 0.7%. The decrease is roughly in keeping with goals for reducing the structural deficit. The business cycle slowdown would, in fact, lead one to expect growing budget deficits. Yet tax revenues continued to be generated by the particular pattern of expansion, specifically as gross wages and salaries as well as nominal consumption expenditures continue to increase significantly. The forecast does not, however, consider burdens on public budgets resulting from a haircut on Greek debt or the establishment of the European Stability Mechanism (ESM).

According to our forecast, Germany will indeed enter an economic slump, but we see little likelihood of a recession based on current data. Economic growth nonetheless continues to face considerable risks. The forecast is based on the assumption that economic policymakers will successfully avert any further escalation of the crisis plaguing national economies within the eurozone, with the tension in this area relaxing somewhat as 2012 progresses. Yet that assumption is by no means certain, considering how nervous financial markets are at present and the lack of any clear vision for solving the debt crisis.

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

Key figures of the RWI forecast of December 2011
Changes in relation to previous year in %

Own calculations according to information from the Federal Statistics Office, the Federal Bank of Germany and the Federal Labour Agency. - ¹Adjusted for price changes. - ²Including non-profit private organizations. - ³Domestic figures. - ⁴National differentiation. - ⁵In differentiation of the Federal Labour Agency (in relation to employed persons in Germany). - ⁶Consumer price index.. ^{- 7}Remuneration per employee in relation to real GDP per employed person. - ⁸In differentiation of the national income accounting. - ⁹In differentiation of the balance of payment. - ^SOwn estimate.