The 57th Annual Meeting of the Ifo Institute took place in the Large Auditorium (Grosse Aula) of the Ludwig Maximilian University of Munich. After words of welcome by the President of the LMU, Bernd Huber, and the Bavarian State Minister for Economic Affairs, Infrastructure and Transportation, Erwin Huber, Ifo President Hans-Werner Sinn presented the latest Ifo economic forecast and spoke at length on employment and combi-wages. Then, the President of the European Central Bank, Jean-Claude Trichet, gave the featured presentation, "Further Integrating Euro Area Economies: Some Reflections". To conclude the public portion of the Annual Meeting, a panel discussion on "Jobs für Deutschland" was conducted. The participants, in addition to Minister Huber und Prof. Sinn, included Prof. Michael Burda, Prof. Ingolf Deubel, Prof. Wolfgang Franz and Prof. Georg Milbradt. The panel was chaired by Nikolaus Piper of the Süddeutschen Zeitung. The Ifo economic forecast, the keynote address of Jean-Claude Trichet and the statements of the panel participants are documented in this issue.
Jean-Claude Trichet
Featured guest speaker at this year's Annual Meeting was Jean-Claude Trichet, President of the European Central Bank. His presentation dealt with the question of the extent to which the introduction of the euro has advanced European integration and what reforms are still necessary to make the European economic system more flexible.
G. Flaig, W. Nierhaus, I. Becker, S. Henzel, O. Hülsewig, E. Langmantel, J. Mayr, W. Meister, M. Ruschinski, D. Ulbricht and T. Wollmershäuser
The world economy is experiencing a robust upswing. The world economic climate, as monitored by the Ifo Institute, improved in the spring 2006 for the third time in succession and is clearly above its long-term average. The expansion of the world economy will continue to be lively in the forecast period but will flatten gradually. The economic situation in Germany is positive in mid-2006. The high level of the Ifo Business Climate Index indicates, that the upswing of the German economy has become broad-based. In addition to the high-speed export locomotive, the domestic economic situation is also improving. Equipment investment has expanded; the recent Ifo Business Survey indicates that not only firms participating in the export boom are investing but now also domestically oriented enterprises. Even private consumption has picked up, after the decline in the last quarter of 2005. Additional impulses will come in the second half of the year from purchases made before the increase in VAT takes effect in January next year. which the higher value-added tax valid from January of coming year can be economized on for a short period of time still. On the whole, real GDP will expand this year by around 1.8%, or by 2% after adjusting for the lower number of working days in comparison to 2005. In the coming year, economic activity will be considerably dampened by the massive increase of taxes and fees, but the upswing will continue none the less. This expectation is based to a large part on the endogenous economic dynamics of the German economy. After a "classical" downturn in the first years of this decade, which was accompanied by a decline in the trend growth rate, the lower turning point was reached in the course of 2004 both for aggregate output and for equipment spending. Since then the German economy has experienced an economic upswing that has further intensified at the beginning this year. According to analyses of the Ifo Institute, such an upswing lasts about four years, as a rule. For this reason the endogenous growth forces, which will be accompanied by strong export growth, should be strong enough to prevent the dampening effects of the planned fiscal policy measures from halting the upswing. The investment growth in equipment and commercial construction will not weaken next year. Also the total number of man-hours worked will increase slightly. In addition the negative effect of the value-added tax increase on consumption might not be as great as many fear. Due to high government deficits, many have expected an increase in taxes for some time, which contributed to weakening consumption and the rise of the savings rate in recent years. By means of the tax increase itself, permanent income and consumption have fallen less than the measured, current disposable income. For all these reasons private consumption need not fall despite the VAT increase and other measures to boost government revenue. Overall, real GDP will increase in 2007 by 1.7%, or, after calendar adjustments, by 1.8%. At a potential growth rate of 1¼% the output gap that has existed since 2003 will be closed in the forecast period. Consumer prices will increase by an average of 1.8% in 2006. Next year inflation will stand at 2.5% as a result of the measures introduced by the Federal Government. For the first time since 2001, Germany will fulfil the Maastricht criteria for the budget deficit. At 61 billion euro or 2.7% of nominal GDP a safety margin of approximately 8 billion euro will remain under the 3% hurdle. In 2007 the deficit rate will fall in our estimate to 1.8% of GDP, but the state is still far from achieving a balanced budget, a goal that should be meet in times of good economic activity. For all that situation will brighten at the labour market by degrees: The number of the employees will increase in the year mean 2006 around 70,000. During the next year the employment climbs a little more slowly; due to the overhang the number of the employees takes in the year mean on the other hand more strongly, past indeed 180,000 to. Jobs with full social insurance adds the half to that for instance. Also the number of the self-employed persons will keep on will increase itself, in spite of an only small expansion of supported existences it will increase around 70,000. The number of the registered unemployed persons will sink in the year mean 2006 around 260,000, in the next year around 150,000.
Hans G. Russ
The business climate in German industry and trade improved in June. With these results the current business situation has now improved for the fifth time in succession; the business expectations in June were also more optimistic. The economic recovery is thus likely to continue.
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