On 23 June 2009 the sixtieth annual meeting of the Ifo Institute took place in the Grosse Aula of the University of Munich. After words of welcome by the University's Vice President, Reinhard Putz, Hans-Werner Sinn presented the latest ifo economic forecast. He saw great risks for further setbacks in the world economy and renewed his criticism of the strong export orientation of the German economy, which as a result is particularly hard-hit by the sharp downturn in world trade. According to Sinn, the danger of deflation is stronger than that of inflation. To combat the financial crisis the state should take on temporary shares in the banks. Guest speaker was Axel Weber, president of the German Bundesbank who spoke on the reactions and the lessons from the global financial crisis. The event concluded with a panel discussion with Axel Weber, Hans-Werner Sinn, Georg Fahrenschon, Bavarian State Minister of Finance, and Theodor Weimer, executive board spokesman of HypoVereinsbank. The statements of Georg Fahrenschon, Axel Weber and Theodor Weimer and the Ifo Economic Forecast are printed in this issue. The presentation by Hans-Werner Sinn and panel discussion are available as a video on the Ifo website.
Kai Carstensen, Wolfgang Nierhaus, Oliver Hülsewig, Klaus Abberger, Christian Breuer, Steffen Elstner, Steffen Henzel, Johannes Mayr, Wolfgang Meister, Georg Paula, Anna Stangl and Timo Wollmershäuser
The world economy is in the midst of the deepest recession since the Great Depression. The pace of the contraction, however, has probably slowed since this spring. Worldwide programmes to boost economic activity have been implemented, and the expansive monetary policies of the central banks are gradually having an effect. Also measures to stabilise financial markets have been taken in numerous countries. Finally, real incomes have been boosted by the strong declines in raw material prices. The world economic climate as surveyed by the Ifo Institute improved in the second quarter of 2009 for the first time since autumn 2007. However, the rise of this indicator was solely the result of more favourable expectations for the next six months, whereas the appraisals of the present economic situation continued to deteriorate, falling to a new historical low.
The German economy is experiencing the worst recession in the history of the Federal Republic. According to the now available official statistics, economic output fell in the first quarter of 2009, seasonally and calendar adjusted, by 3.8%, and already in the fourth quarter of 2008 the economic output had declined by 2.2%. Germany has thus experienced the sharpest collapse in growth of all major European economies. Also in an historical perspective, this is without precedent. After the drastic drop in the winter half year 2008/09, economic output has likely also fallen in the second quarter, albeit at a reduced pace (current rate: -0.7%). Signs of the start of a gradual stabilisation are seen in recent developments of a number of important cyclical indicators such as production and incoming orders as well as the Ifo Business Climate. The decline in economic output comes especially from manufacturing as well as the sectors of financing, leasing and business services. For the first half-year 2009 a seasonal and calendar adjusted decline in real GDP of 5.2% will occur in comparison to the second half year 2008; in a year-on-year comparison the decline amounts to 7.5%. The downturn will continue throughout the forecast period. After a temporary increase in summer primarily driven by fiscal stimulus, the basic tendency of economic output will be further contraction. Although no further dampening effects are foreseeable from net exports, the decline in equipment and construction investments will continue. The reduction in inventories has also not yet been concluded. In addition, private consumption will fall starting in the autumn months due to the decline in employment and strong increases in unemployment. Not until spring 2010 can we expect the fall in production and demand to bottom out. Afterward, real economic output should increase somewhat. As the world economy gradually recovers, exports will increase somewhat; also equipment investment should recover moderately. Towards the end of 2010, anticipatory effects are likely due to the restoration of the declining balance method of depreciation. The economic stimulus packages will stimulate construction investment. On the whole, however, the economic dynamics will not be strong due to the weakness of private consumption so that the operating rate of the economy will fall. On average for 2009 total economic output will decline by 6.3%, in both unadjusted and calendar-adjusted terms. In 2010, due to the low initial level, a decline of only 0.3% (calendar adjusted: 0.4%) is expected.
The recession will become increasingly noticeable on the labour market as of the summer months of 2009. The build-up of reduced working hours will come to a standstill and the numbers of unemployed will increase at an accelerated rate. On average for this year, employment numbers will fall by 460,000 and next year by as much as 1.05 million. The number of unemployed will rise by 320,000, on average for 2009, and by 760,000 in 2010. At the same time, consumer prices will remain virtually stable. For this year an inflation rate of 0.2% is expected; in 2010 it will average only 0.4%. The budget deficit will grow unusually strongly in the forecast period. In 2009 the deficit will increase to 3.4% of nominal GDP but in 2010 to 6.0%. This is caused by the economic situation, which will lead to enormous revenue shortfalls and additional expenditures, but there are also strong discretionary impulses in connection with the government's stimulus packages.
Klaus Abberger
The Ifo Business Climate improved again in June. The improvement was solely the result of the firms' expectations. The pessimism of the survey participants with regard to business in the coming half year continued to weaken. Firms are just as dissatisfied with their current business situation as they were in May, however. There are thus growing indications that economic output is stabilising. Against the background of the considerable degradation in the business situation in the past half year, this can hardly be seen as a turn for the better, however.
In English published as: Results of the June 2009 Ifo Business Survey (Summary) (PDF, ca. 250 kb).
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