Ifo Economic Forecast 2013/2014: Favourable Perspectives for the German Economy
Jun 26, 2013
After a weak winter the German economy looks set to revive over the course of 2013. These are the indications of the Ifo Business Climate Index, which has stabilised at an above-average level in recent months. As long as no significant escalation of the euro crisis occurs, the outlook for next year is also favourable. Real gross domestic product, at a (2/3 probability) uncertainty interval of 0.0% to 1.2 %, should increase by 0.6 % on annual average in 2013. Growth of 1.9% is expected for 2014. Only moderate improvements, however, are expected in the employment situation.
World economic situation
Since last autumn the world economy has stabilised at a relatively low level. As a result, world industrial production and world trade hardly lost any impetus in the winter months, after a steady drop in their growth rates over the previous two years. The stabilization was primarily due to relatively robust economic developments in the USA, Japan and the key emerging economies, which offset the recession in the euro area. The pace of world growth should pick up moderately over the summer. These are the indications of the Ifo World Economic Survey, as well as numerous other early indicators and sentiment indicators, which have been following a slight upward trend for several months.
Assumptions and risks
This forecast is based on the assumption that the structural adjustments in the euro area will continue as announced. This is also the most important precondition for no fresh turbulence in the financial markets, and thus for no renewed escalation of the euro crisis. Based on this assumption, the slow build-up of investor, consumer and producer confidence should continue. However, this baseline scenario is overshadowed by considerable risks, especially extremely loose monetary policy. Interventions by central banks may have helped to stabilise the economies of advanced economies and prevent recession from deepening, but fears remain that the ECB's declaration of its willingness to make unlimited purchases of government bonds should they be required will create false incentives for the governments of the European crisis countries. In view of such "financial backing" from the ECB the latter may namely be tempted to make less effort to reform and consolidate their economies. The latest announcement by the EU finance minister that the agreed budget targets for a series of euro countries are to be softened would already seem to signal that things are moving in this direction.
Outlook for the world economy
Several early indicators point to a moderate upturn in the world economy over the summer. Insofar as the baseline scenario materializes, the pace of the world economy should pick up over the rest of the forecasting period. That said, no sharp acceleration is expected. The restructuring of the crisis afflicted member states of the euro area, as well as the necessary debt reduction, is expected to curb growth in the most advanced economies. All in all, world gross domestic product should increase by 2.9% this year and 3.7% next year. World trade is likely to increase by just 2.6% in 2013, followed by 5.5% in 2014.
Economic outlook for the euro area
After the sharp downturn in the winter the economic performance of the euro area should pick up again clearly in the second quarter. However, this will mainly be due to weather-related recovery effects in the construction sector, which exaggerate the un-derlying economic trend. Only marginally positive growth rates are expected for the rest of the year as a result. Due to its low starting level at the beginning of the year, gross domestic product should decline by 0.6% on annual average. Growth of 0.7% is ex-pected for 2014.
Developments in individual member states look set remain very heterogeneous over the forecasting period. Aggregate production in the crisis countries (except Ireland) is likely to continue to decrease as a result; and the adjustment processes related to public and private debt levels, as well as the sectoral mix of these economies, are far from over. Contraction rates should nevertheless fall slightly over the course of the year ahead. However, economies in a structurally stronger position like Germany and Austria will probably benefit more from the improving world economic and favourable refinancing conditions.
The weak economy should boost the unemployment rate, with major regional differ-ences, to 12.4% this year and 12.8% in the year ahead. In view of this high level of underemployment, wage increases are expected to be very moderate, meaning that inflation will continue to weaken to 1.6% this year and 1.5% next year.
Situation of the German economy
In Germany the economy started the year weakly: in the first quarter of 2013 real gross domestic product increased by just 0.1%. Prior to this overall economic output had fall-en sharply by 0.7%. Uncertainty surrounding the economy's progress heavily curbed demand from domestic investors and consumers during the last quarter of 2012, while exports, especially to the euro area, slumped. Private consumption was almost entirely responsible for the stabilization of the economy in the first quarter, while net exports provided hardly any impulses.
Against this background employment increased at a slightly faster pace. The volume of work done (in hours) did not expand so significantly because fewer hours of overtime were obviously worked. With productivity falling against a background of rising com-pensation for employees, unit labour costs have risen sharply recently. The number of unemployed persons continued to follow a slightly upwards trend against a background of growing labour supply.
Outlook for the German economy
The German economy picked up very clearly in the spring months of this year. Expan-sive impulses mainly came from manufacturing, boosted by lively export demand, es-pecially from China, South East Asia and the USA. Production disruptions related to bad winter weather conditions were also compensated for in the construction sector. Although fresh production disruptions were caused by the recent flooding in Southern and Eastern Germany, these were restricted to certain regions and should be rapidly recouped in many cases. Moreover, very few larger companies were directly affected by the flooding.
Compared to developments in the second quarter, which were exaggerated by catch-up effects, the economy should move down into a lower gear in the second half of the year. This, however, should be offset by impulses from the reparation of flood-related damages to fixed assets. Moreover, the significant repair costs should cut out expendi-ture in other areas. This forecast is based on the assumption that additional demand for consumer and capital goods totalling 6 billion euros will be generated by the end of 2014 on balance, including around 3 billion euros this year.
All in all, real gross domestic product in 2013 should only increase by 0.6% on annual average due to its low initial starting point at the beginning of the year. The basic eco-nomic trend is expected to remain clearly on an upward path next year since the framework conditions for the German economy remain favourable. Loose monetary policy and the very abundant supply of capital in particular are leading to historically low interest rates and very advantageous credit conditions. The upturn will be driven by the domestic economy. Investments in construction and equipment should increase significantly, private consumption looks set to grow at the pace of constantly rising real income, namely at a good 1%. Overall real gross domestic product is expected to grow by 1.9% in 2014.
Against this background employment should increase by around 250,000 persons on average in 2013. In 2014 this growth is only expected to total 100,000 persons. Although the favourable economic situation would seem to support an uptick in labour demand, the significant increases in wage costs in recent years should offset any upturn. Unemployment will continue to increase at first, not least because the labour supply should grow thanks to immigration.
Consumer prices are expected to increase by 1.6% this year and by 1.8% next year, since the domestic rise in prices should gain impetus slightly thanks to the strong eco-nomic situation. The government budget will see a slight deficit of around 5 billion euros in 2013. In 2014 the shortfall should decrease to around 3 billion euros. On the basis of this almost balanced budget, the general government gross debt to GDP ratio looks set to fall from 81.9% in 2012 to around 77½ % in 2014. However, this presupposes that, on balance, there is no increase in debt levels arising from additional measures to bail out banks or the euro such as, for example, a haircut for Greece.
For a detailed presentation of the economic forecast see: K. Carstensen, W. Nierhaus, T. O. Berg, C. Breuer, C. Grimme, S. Henzel, A. Hristov, N. Hristov, M. Kleemann, W. Meister, J. Plenk, L. Salzmann, K. Wohlrabe, A. Wolf, T. Wollmershäuser, P. Zorn: ifo Konjunkturprognose 2013/2014 – Günstige Perspektiven für die deutsche Konjunktur, ifo Schnelldienst, to be published.