Moderate Recovery in Germany

Press Release of March 11, 2010

The cyclical situation in Germany remains fragile. The recovery of last summer has come to a standstill in winter. Real GDP stagnated in the fourth quarter. In the first quarter of 2010, real GDP is likely to have fallen significantly as a result of both the unfavorable weather conditions and the weak underlying tendency. The latter is documented by the slow increase in industrial production in January as well as by the cautious improvement of economic sentiment indicators in recent months. Given that production losses which result from unfavorable weather conditions will typically be regained in the course of the year, we have left unchanged our forecast for GDP growth in 2010 at 1.2 percent.

Unemployment will soon start declining

The situation on the labor market has remained astonishingly stable. In the course of the recession, the unemployment rate has increased only slightly – even if one takes into account changes in the statistics. In February 2010 unemployment was at 8.2 percent. Employment even increased around the turn of the year while short-time work declined at the same time. Wage settlements indicate a sharp slowdown in wage growth for 2010, and for 2011 we expect wages to increase faster than in 2010 but still rather moderately. Against this background, labor demand – as measured by hours worked – will increase moderately in the forecast period. Employment will fall slightly this year as hours per person recover from the very low levels they have reached during the recession. Next year employment will increase. Thanks to a declining labor force, unemployment will stagnate this year, before starting to fall in 2011.

Outlook: a more broadly based recovery

After a weak start, aggregate production will increase in the course of the year, albeit moderately. Domestic demand will continue to be stimulated by fiscal measures. Private households’ disposable incomes benefit from tax reliefs, and public investment is spurred by the fiscal package that was implemented in 2009 but had not been called upon to a large degree. Capacity utilisation in the manufacturing sector is still near its all-time low. Nonetheless, business investment has likely seen its cyclical trough, given that business expectations have risen and costs of financing are low. Residential investment is benefiting from historically low mortgage rates. Exports will continue to recover. However, since growth in trading partner countries remains subdued, the stimulus will be weak. Overall, we expect real GDP to grow by 1.2 percent in 2010. Consumer price inflation will remain low. The public budget deficit will be above 5 percent in relation to GDP.

Next year, the recovery will gain some momentum. Again, expansionary fiscal policy will play a main role in the upswing. The income tax will again be reduced, although probably by less than expected by us in our December forecast. With employment and profits rising again, real disposable income will grow significantly faster and so will private consumption expentiture. Domestic demand will be the driver of the recovery while the stimulating effects from abroad become less important as the recovery abroad loses momentum and German price competitiveness dwindles as a result of slow wage growth in trading partner countries. Overall, real GDP will grow by 1.8 percent, and inflation will stay subdued. The public budget deficit will remain at around 5 percent in relation to GDP as the tax receipts to be expected from the cyclical improvement will be spent on tax cuts, whereas government expenditures will not decline.

Key Economic Data for Germany, 2008–2011

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