The RWI lowered its economic growth forecasts for 2009 and 2010 to -6.4% and 0.2% respectively, meaning a sharp downward revision compared to its March forecast. Nevertheless, the institute sees signs that the downward trend has decelerated and the bottom should be reached shortly. Foreign trade should once again modestly boost economic growth next year. Meanwhile, unemployment is expected to reach 4 million by the end of this year and 4.6 million by end 2010. The budget deficit will increase substantially.

The RWI has again significantly lowered its forecast for economic development in Germany compared to its previous outlook published in March. While a drop of 4.3% was forecasted in March, the institute now expects real GDP to contract by 6.4% this year. The main reason for the revision is the unexpectedly sharp deceleration in the economy during the first quarter of 2009.

Yet several indicators suggest that the downward trend has slowed down and the economic contraction is already bottoming out. World trade and global industrial production declined only slightly in recent months. An increased number of listings in the commodities markets additionally suggest a renewed rise in demand. Expectations have also become more positive, as company surveys and rising stock prices indicate. This may be partly attributed to the major stimulus programs that have been implemented in almost every country and are now gradually taking effect.

Modest GDP growth possible in 2010

Despite those signs, the situation is still mostly assessed as highly unfavorable, and there are no indications of the start of a strong recovery. This comes as no surprise: recessions associated with financial crises tend to last longer than "normal" recessions and the ensuing recoveries are usually not vigorous. Besides that, virtually every country in the world has been affected simultaneously. Accordingly, the RWI forecasts only a gradual stabilization for 2010 with GDP increasing by 0.2%.

Collapsing exports and equipment investments have played the major role for the current recession. Exports were 10% below their level of the last quarter of 2008, when they had already declined by 8%. Investments in equipment declined even stronger, by 16.2% relative to the previous quarter. This can be attributed to the dramatic drop in capacities utilisation, dwindling hopes of short-term improvement, and to less favorable financing conditions. Meanwhile, consumer demand, backed by low inflation and increases in various transfer payments, has still remained stable. The slump in foreign trade should gradually taper off. The fiscal stimulus packages are expected to provide impetus to construction investments. For equipment investments on the other hand, no turnaround is yet in sight, though the rates of decline should become somewhat more moderate.

Declining consumption and continually rising unemployment next year

For the coming year we expect foreign trade to modestly boost economic growth. In addition, investments in equipment should increase toward year's end as the option of accelerated depreciation is discontinued, which is expected to encourage businesses to bring forward their investment plans. Private consumption, however, is expected to decline as unemployment should rise significantly. So far reduced working hours have successfully dampened the increase in unemployment but we expect workers to be laid off increasingly in the second half of 2009 as the outlook for businesses remains gloomy. We forecast almost 4 million people to be registered as unemployed by the end of this year about 4.6 million by the end of 2010. In addition, the unfavorable situation on the labor market will likely put significant pressure on wage increases. Beyond this, no pension increase is expected for 2010.

Capacities will not be fully utilized, and the fall in oil prices will generate a dampening effect on the overall price level. Therefore, inflation will remain moderate. We expect an inflation rate of a mere 0.3% this year, followed by 0.8% in 2010.

National budget deficit will increase significantly

Germany's financial situation will deteriorate considerably. This is to be attributed to declining revenues from taxes and contributions, as a result of the economic contraction, as well as to increased expenditures for unemployment. Added to this is the heavy burden placed on Germany's budget due to the stimulus packages and to the implementation of two rulings the Federal Constitutional Court. We therefore expect the federal budget deficit to rise to 4% of nominal GDP in 2009 and 6% in 2010.

This forecast entails a large degree of risk due to the great uncertainty that continues to prevail among large segments of the economy and the population. Even if an increasing number of indicators suggest stabilizing conditions, further setbacks cannot be ruled out. There are, however, favorable aspects as well, especially considering the healthy condition of the German economy prior to the onset of the financial crisis. Germany was very competitive on the world market and, unlike many other countries, did not experience a real estate bubble which could hinder the future development of the domestic economy. Germany has been drawn into the downward spiral mostly due the slump in international trade. Being highly dependent on exports and specialized on cyclically sensitive industrial products Germany has even been one of the hardest-hit countries in Europe. Conversely, should international trade recover more rapidly than is expected here, the German economy would benefit more than other countries.

For further information, please contact::
Dr. Roland Döhrn, Phone:+49 201 8149-262, e-mail
Sabine Weiler (Press Office), Phone:+49 201 8149-213, e-mail