RWI has improved by 0.3% its September forecast for the growth of real gross domestic product (GDP), to a total of 3.7% in 2010 and 2.5% in 2011. Yet it remains to be seen how the public debt crisis in the eurozone and the US real estate crisis will unfold. With shorter working hours largely phased out and the employment level continuing to rise, next year should see an increase in employee incomes and consequently in private consumption expenditures. Higher contributions to statutory health insurance and to unemployment insurance are, on the other hand, expected to have a dampening effect on economic growth, so that the economy will probably expand at a slower pace than in 2010. The number of people registered as unemployed is expected to drop below the three million mark in 2011, while Germany’s budget deficit will probably also continue to decrease.

German is continuing to experience a stable recovery There are numerous indications of growth accelerating once more at the end of 2010 as the recovery takes hold in more and more sectors. This trend could be reinforced, as many businesses move investments up in time in order to take advantage of the more favorable write-off requirements in effect until the end of 2010. With these factors in mind, we expect the GDP to increase by 3.7% this year.

There is a fair probability of the recovery continuing in 2011. Granted, the global economy is expected to grow only sluggishly, so that the export economy will receive little stimulus. Replenishment of inventories is also likely to slow down, a factor substantially responsible for growth in 2010, after many businesses had drastically reduced stock during the recession. With respect to the remaining factors responsible for domestic demand, growth comparable to the vigorous level seen in 2010 is generally expected in contrast, on account of increasing employment and greater utilization of production capacities, even though financial policy will have a noticeably restraining effect.

Recovery pace likely to slow down in 2011

Interest rates, expected to remain low until the end of the forecast period, should have a stimulating effect. As a result of the continued rise in employment and of largely phasing out shorter working hours, actual earnings – and thus employee incomes – are also expected to increase considerably, particularly as labor shortages become evident in certain regions and sectors. Private consumption expenditures are consequently expected to increase at a higher rate. The planned increase in contributions to statutory health insurance and to unemployment insurance at the beginning of 2011 will have a dampening effect on the growth cycle. In addition, financial policymakers have begun to phase out the economic stimulus measures while passing an austerity package that includes a heavier tax burden, the elimination of a number of social benefits and only a modest increase in public consumption expenditures. On balance, we expect the economy to grow at a slower pace than in 2010. We are predicting a 2.5% increase in GDP, with 1.5 percentage points of this figure attributable to statistical effects.

The forecast is obviously fraught with considerable uncertainties. For one thing, the US real estate crisis is far from being resolved, and the persistently high unemployment rate in the United States could dampen, more strongly than we expect, consumer demand and, in turn, global economic growth. Yet, more significant for Germany are the risks posed by the public debt crisis in the eurozone. There is a danger that other countriesin addition to Greece and Ireland will no longer be able to refinance their national debt from the capital market and will thus have to seek refuge under the EU rescue umbrella. Apart from the long-term repercussions for the stability of the eurozone, growth in the region could be dampened if these countries had to implement more far-reaching consolidation measures than the ones currently planned. On the other hand, the ECB would continue to pursue an expansive monetary policy in such a situation; were the euro to devalue as a result, Germany’s economy would receive a brief stimulus. There would, however, also be a higher risk of inflation afterwards.

Continued drop in unemployment expected

Prices in Germany have already increased more sharply in recent months. The hikes were mainly attributed to higher prices for energy and foods. Core inflation continues to hover at a level below 1% and is not expected to rise at a higher rate during the forecast period. While the unit labor costs are expected to increase, import prices will probably drop as the year progresses. We expect inflation to increase by an average of 1.6% in 2011. Should production levels develop as forecast, the labor market situation will continue to become more favorable. The average number of registered unemployed individuals is expected to drop below the three million mark, with the average unemployment rate decreasing to 7.0% after 7.7% this year.

Public budgets are also likely to continue to improve. Thanks to the unbroken economic upswing, a continual strong increase in government revenues is expected. In addition, budget consolidation will be effective. Based on this scenario, Germany’s budget deficit will shrink considerably to a level of 2.5% of gross domestic product.

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

Key figures of the RWI forecast of December 2010
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). - ⁶Remuneration per employee in relation to real GDP per employed person. - ⁷In differentiation of the national income accounting. - ⁸In differentiation of the balance of payment. - ^SOwn estimate.