Severe Recession in Germany

The German economy faces the severest recession since 1974. Virtually all leading indicators have wor-sened drastically in recent months. Aggregate production is likely to have declined strongly in the fourth quarter of 2008 and to decline even more sharply in the first quarter of 2009. In the rest of the year 2009, production will continue to decline, albeit less strongly. We revise our forecast for GDP growth in 2008 from 1.9 to 1.5 percent and that for 2009 from 0.2 to –2.7 percent.

Outlook: Still no light at the end of the tunnel

GDP will decline in the course of 2009. Exports, in particular, will shrink sharply as a result of the re-cession in almost all industrial countries and weakening growth in emerging market economies. Investment will also be cut down as sales perspectives and financial conditions worsen. Private consumption, in contrast, is likely to grow. Real disposable income will expand despite falling profits and declining employment as a result of tax cuts and of the pronounced fall in energy prices. The latter is also responsible for the sharp decline in inflation to a rate of only 0.7 percent. The labor market will not decouple from the cycle. Unemployment will rise by 750,000 persons in the course of the year.

We expect the economy to gradually stabilize in 2010. The world economy will recover, albeit only slightly, so German exports will start to grow again, although at a very moderate pace. In the second half of the year, the change in GDP is likely to return into positive territory. Capacity utilisation, however, will continue to decline, not least because credit conditions remain tight. Overall we expect GDP to grow by 0.3 percent. Unemployment will continue to rise; at the end of the year the number of unemployed will be close to 4 million. Inflation will remain low.

Key Economic Data for Germany, 2007–2010

Business Cycle Forecast