The RWI has increased its September forecast for the growth of real gross domestic product (GDP) in 2010 by 0.4% to a total of 1.6%. The increase results mainly from the low statistical level going into the year; recovery otherwise continues to be seen as moderate. Consumer demand is expected to stagnate while company investments are expected to increase slightly. Expansion will be driven by government consumption, public investments and net exports. The total level of economic activity at the end of 2010 will probably still be 4% below the peak value prior to the recession. While the labor market has been remarkably robust in the crisis up to the present (not least due to shortened working hours) it must be expected that businesses will cut employment in the coming year. Consumer prices are expected to rise by 0.9%.

Following the dramatic slump in the winter half year 2008 / 2009, the global economy has picked up since last spring. Overall economic production has since improved in most national economies. The emerging countries in Asia, in particular, having suffered heavily from the slump in world trade, but have recovered quickly, due to, among other factors, the result of China¿s stimulus packages. Monetary and fiscal policy provided strong impetus in the industrial nations, so that domestic demand stabilized in those countries. Nonetheless, production continues to remain well below the level prior to the onset of the financial crisis, and recovery is being encumbered by a number of factors. Consequently, the impetus provided by economic policy will in many countries not be as strong and businesses will continue to face difficult financing conditions. In contrast to 2009, commodity markets will no longer be a source of relief for industrial nations.

A turn in the business cycle is also being seen in Germany. Businesses are receiving more orders, especially from other countries. In addition, the effect of the stimulus programs is becoming increasingly apparent. Public investments increased to a noticeable extent recently, government consumption has risen and the scrappage bonus has had a stabilizing effect on automobile production. The gross domestic product has overall increased in the last two quarters. Yet, one should be cautious with the positive data: the upward trend is fragile. For instance, there was again a slight drop in production and orders received in October. Moreover, the production level continues to remain lower than before the onset of the crisis, while production capacities are far from being fully utilized in some cases. That is particularly true for the manufacturing sector, while in a number of service sector industries the recession has yet hardly been felt.

The latter is to be attributed at least in part to the fact that incomes, and with them consumer demand, have continued to remain stable up to now. The reasons for this are that wages and pensions tend to follow the economic cycle with delay, government transfer payments were increased and income taxes decreased and buying power has received impetus from periodic decreases in consumer prices (as a result of falling commodity prices). In addition, the employment level has so far hardly been adjusted to the production slump.

Labor market still stable, yet the employment level should drop in 2010

The stability in the job market is the most surprising feature of the current recession. In the past, downswings were always accompanied by drastic increases in unemployment. One of the causes for this is the difference among sectors already touched on: many jobs have been lost in the manufacturing sector, while at the same time in some service sectors new jobs have been created. Yet the primary cause has been the fact that working hours per employee have been reduced considerably, particularly in the manufacturing sector. The intensive utilization of options for shortened working hours has played a major role in this development. In addition, more flexible clauses in union contracts, providing for the introduction of working-time accounts and the reduction of weekly working hours, have allowed working hours to flexibly adjust to the business cycle.

Businesses have additionally accepted a reduction in productivity, so that unit labor costs have risen considerably. But businesses should not be able to sustain these increased costs and will probably need to gradually adjust employment levels to reflect the decrease in production. This development will be a major detriment to recovery in the coming year. Another factor hindering expansion in this country is the difficult financing conditions under which businesses continue to operate. Indications of this are the drop in credit ratings for many businesses resulting from the recession and the need for banks to consistently write off large amounts in loans. This amount may even increase as a result of businesses defaulting on loans. In addition, the commodity markets will no longer have a dampening effect on price levels and the economic stimulus programs will gradually lose their impetus.

With these factors in mind, we expect only a moderate recovery in 2010. The real gross domestic product is expected to increase by 1.6% on a yearly average, while a major part of this increase (0.8%) is to be attributed to the low statistical level at the outset. Due to these dampening factors, expansion during the first six months of 2010 is expected to be weaker than during the second half of 2009. Stagnating consumer demand will play an especially significant role. Businesses are scarcely increasing investments. Government consumption, public investments and net exports continue to expand the economy. Economic growth should accelerate somewhat in the coming year, as capacities come to be utilized to a fuller extent and more investments are made to replace machinery and as the global economy continues to gain momentum. Nonetheless, the total level of economic activity at the end of 2010 will probably still be 4% below the highest value prior to the recession.

Deficit expected to increase to more than 5% in 2010

Consumer prices are expected to increase by 0.9% in 2010, whereas two effects may partly offset each other. Energy prices, on the one hand, are expected to rise rather strongly at this time, since the world market prices for oil and natural gas have again risen to a considerably higher level than in the previous year. Production capacities, on the other hand, which should continue to be underutilized, will put pressure on prices for industrial goods.

The situation in the labor market will not deteriorate as badly as was expected by many a year ago. Unemployment is nonetheless expected to increase. We expect the number of registered unemployed to increase to 3.8 million by the end of 2010. Considering the excessive number of employees existing at present, many businesses are not likely to be motivated to hire new staff to fill the positions becoming vacant. The number of unemployed is therefore likely to increase until well after the recovery has begun.

The recession will not leave its mark on public budgets to its full extent before 2010. In 2009 the structure of the gross domestic product was still very much characterized by expenses, since, as mentioned above, available income and private consumption were hardly affected by the recession. For this reason, the deficit level for 2009 should only reach slightly more than 3%, despite the demands placed on the budget by the stimulus programs and the aid measures for banks and businesses. We are expecting a deficit increase to 5.1% in 2010.

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