RWI is revising its economic cycle forecast upward slightly and now expects the German economy to grow by 1.1% this year, after a March forecast of 1.0%. The increase is largely attributed to vigorous expansion during the first quarter. A weaker rise in the GDP is emerging for the second quarter of 2012. The RWI is still expecting the GDP to grow by 2.0% for 2013. Afterwards the German economy will probably receive added stimulus as interest levels remain low. Employment levels are predicted to increase further, rising slowly this year and more rapidly the next. The condition of public budgets is also likely to improve during the forecast period. Considerable risks will prevail, however, specifically on account of continued turbulence in the eurozone and a slower business cycle in Asian countries.

Two conflicting trends are influencing the German economy during the early summer months of 2012. On the one hand, the international environment has clearly become less favorable, with economic growth obviously losing impetus both among emerging nations and in the US. The problems plaguing public budgets within the eurozone have worsened. Most recently, production has been declining, and the eurozone has apparently entered a recession. Germany, in contrast, continues to enjoy favorable domestic economic conditions. The employment level has continue to increase up to now. The purchasing power of private households has been additionally reinforced in recent weeks by falling commodity prices, a factor which is expected to dampen price increases overall. Interest rates, already at a low level, have also continued to fall, which should provide stimulus especially to the construction sector. Yet, the crisis in Europe is having more and more impact on the business cycle in Germany as well. One example of this is the currently declining volume of orders received from eurozone countries, with the business climate worsening considerably. As has very often been observed, this leads businesses to exercise restraint in their investments.

Based on these observations, the RWI is expecting the business cycle in Germany to turn upward only gradually in 2012. While the gross domestic product is expected to increase by 1.1%, this is to be largely attributed to the vigorous growth seen during the first quarter. A weaker rise in the GDP is emerging for the second quarter of 2012. For the rest of the year, low interest rates and rising incomes should result in somewhat greater expansion of aggregate production. Yet the unfavorable international environment is likely to hinder any vigorous growth. Next year, meanwhile, the continuously low interest rates are expected to provide the German economy with greater stimulus, once the situation in the eurozone has been stabilized. The GDP is consequently expected to increase by 2.0%.

Domestic demand and exports will boost Germany’s economy

Both this year and next, domestic demand is expected to be the driving force behind economic growth in Germany. Investments in construction and private consumption in particular are expected to increase considerably. Due to the high level of uncertainty among businesses, investments in equipment are in contrast expected to initially decline this year and to first pick up again in the course of 2012. Even though for exports only weak growth will probably be seen, net exports are nonetheless expected to contribute slightly to growth in GDP. Specifically, imports are likely to decrease more sharply than exports during the first six months of 2012, as a result of declining investments in equipment and low foreign sales.

The upward trend seen for the job market will probably level off as the business cycle slows down. Yet, since in many sectors workers are scarce, businesses will continue to be mindful of retaining employees, even accepting a temporary drop in productivity, if necessary. Labor intensive industries in particular benefit mostly from strong domestic demand, so that employment levels are expected to rise continually, although not as strongly as last year. Job market expansion should begin to accelerate again in 2013. Unemployment will probably continue to decline more gradually than would otherwise be expected from job market trends. One reason for this is the considerable number of workers expected to migrate to the German labor market on account of the more attractive conditions compared with the rest of Europe.

Inflation expected to drop – less burden on public budgets

As the business cycle slows down and commodity market prices drop, prices are expected to increase less rapidly. We anticipate an average increase in consumer prices of 1.9% for 2012 and 1.7% for 2013. The condition of public budgets will probably improve somewhat in 2012 and 2013, since economic expansion continues to follow a pattern that yields tax income. Specifically, covert tax hikes will continue to result from the unbroken trend toward price increases. The deficit is expected to decrease to 0.3% this year, and a balanced budget will probably be achieved next year.

Following the upswing in the first quarter, the German economy is expected to experience a slight setback on the whole. Yet, we see little probability of Germany sliding into recession. Substantial downward risks remain nonetheless. Especially within the eurozone, the unresolved issues plaguing national budgets are expected to cause intermittent turbulence, which could exacerbate the recession in these countries. If the growth among Asian economies additionally slows down, Germany could slip into a recession as well.

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

Key figures of the forecast of June 2012
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 Labor Agency. - ¹Adjusted for price changes. -²Including non-profit private organizations. -  ³Domestic figuers. - ⁴National differentiation. - ⁵In differentiation of the Federal Labor Agency. - ⁶Consumer price index. - ⁷Remuneration 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.