Germany: Recovery Continues at More Moderate Pace - Risk of Setback Due to the Debt Crisis

 Press Release June 17, 2010

The cyclical recovery in Germany continued at the beginning of 2010. In the first quarter of 2010, real GDP grew only by 0.6 percent at an annual rate. However, this is partly the result of rather unfavorable weather conditions. It is very likely that the production losses of the first quarter of 2010, in particular in the construction sector, have largely been made up for in the second quarter. In addition, the acceleration of industrial production growth and of growth of orders to manufacturing as well as the marked improvement of the business climate assessment of firms in the first months of the year indicate that the overall tendency was quite strong in spring. We now expect GDP to have risen by 5.8 percent at an annual rate in the second quarter. This implies that the overall cyclical momentum has been higher in the first half of 2010 than we expected in our previous forecast.

At the same time, macroeconomic risks have risen in recent months. The turmoil on financial markets related to the budgetary difficulties of a number of euro area countries temporarily depressed stock markets and increased volatility on financial markets. Currently, high government debt represents the largest single risk for the cyclical recovery.

Outlook: Moderate expansion as the most likely scenario

Looking forward, the most likely scenario nonetheless remains that financial markets calm down and allow the recovery to continue. Still, GDP growth will be slower in the second half of 2010 than in the first half. The recovery of the world economy has passed its cyclical peak. Thus, while the depreciation of the euro will continue to stimulate net exports, overall impulses from abroad will become smaller. In particular, demand from the rest of the euro area will slow down significantly as a result of the fiscal tightening announced or likely to be announced in most countries. Domestic demand, in contrast, will gain momentum. Partly, this is due to the expansionary fiscal measures that stimulate public construction investment and private household consumption. In addition, mortgage rates are on historically low levels, stimulating investment in housing. Business investment will be stimulated by the fact that favorable depreciation rules for tax purposes are only effective until the end of 2010, so there are incentives for advance purchases – which, of course, will dampen investment growth in 2011. All in all, we expect real GDP to grow by 2.1 percent in 2010. The situation on the labor market will continue to improve. The average number of unemployed will be 3.2 mill. Inflation will remain moderate, with consumer prices rising by 1.3 percent. The public budget deficit will increase to 4.4 percent in relation to GDP.

Next year, GDP is projected to grow by 1.2 percent only. The fiscal stimulus program will be replaced by measures for fiscal consolidation. In addition, net exports will not contribute to growth as the stimulus from the depreciation of the euro fades out and GDP growth in the rest of the euro area slows down. Investment growth, however, will be supported by the fact that interest rates remain low. Inflation is likely to fall slightly, to 1.2 percent, Unemployment will on average be below the 3 mill. mark. The public budget deficit will fall to 4.0 percent in relation to GDP.

Key Economic Data for Germany, 2008–2011

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