The German GDP will only grow by 1% this year. A noticeably economic recovery and an economic growth of 2,3% can not be expected until next year. This conclusion is reached by the DIW Berlin in its summer-baselines on the economic development 2001/2002. The eurozone, too, is expected to show a slower economic expansion this year; the GDP will only increase by 1,9%. An economic recovery is not expected before 2002. The aggregate output will then increase by 2,5%. In order to lastingly overcome the economic downturn the DIW Berlin suggests a four-point strategy which is focusing on monetary policy, wages policy and financial policy.
Economic activity has lost dynamics world-wide. The economic downturn in the USA has been particularly strong. Japan is in danger of going through another recession after 1999/2000. The world-wide economic downturn has also a marked effect on the eurozone in 2001. It brings the economic upturn to an halt and dashes hopes to further reduce unemployment. The greatest obstacle to economic upswing in the eurozone this year has been the unexpected upsurge in prices. Problems on the international petrol markets, which resulted from bottlenecks in the refineries, led at times to a drastic increase in petrol prices. Livestock epidemics furthermore contributed to the rise in prices, particularly in the food sector. Partially massive tax relieves in some eurozone countries had not the desired expansive effect on private consumption. All this developments turn out even more disadvantageous as the European economy had been in a downward movement last year due to a stricter monetary policy.
The economic climate will improve in the year to come. Due to an expansionary economic policy in the USA the countries' economy will soon recover. After having grown 1,4% this year the DIW Berlin reckons that the American GDP is going to rise by 2,2% in the year to come. The expected easing of the ECB's monetary policy (reduction of the key interest rate by half a percentage point) will have a positive effect on the eurozone's economy.
The German economy has not been able to avoid the global economic pressure this year. On the contrary- the country has been particularly affected by the difficult world-wide economic situation which can be mainly attributed to the fact that Germany is highly depending on its export industry. According to the DIW Berlin the positive effects of the tax reform will not even come to fruition if prices are back on a more stable level. Although prices will only increase by an annual average of 2,7% in the second half of this year they will not fall. The next level of the tax reform will neither give a delayed nor significant impetus to the economy.
Employment will remain on a low level in Germany in 2001. Employment rates will only increase by 0,5% in 2001 and 2002. However, the situation on the labour market should ease off in 2002. The seasonally adjusted number of unemployed will probably amount to 3,7 Mio in autumn. Yet, the Berlin institute thinks that it is possible that the seasonally adjusted number of unemployed settles down at 3,5 Mio.
The DIW Berlin suggests the following measures to be taken in order to lastingly overcome the weakness of economic activity:
1. Monetary policy should rapidly cut down the key interest rate to 2½ % which is 1½ % more than suggested in this forecast. The key interest rate would then be exactly at the same level as it was at the end of the Asia crisis in 1999.
2. There should be an output related wages policy in the eurozone as this would allow wages to rise by a good 3%.
3. Wages policy should strengthen the monetary policy's trust in a more stable development of wages by long term wage agreements. The German wages policy should set an example as wage agreements in Germany always have an effect on other EU memberstates' agreements.
4. Financial policy in the eurozone should accept higher cyclical deficits, as was partially suggested in the forecast. A rigid sticking to the former defined goals in terms of deficits would lead right into a recession. However, a temporarily increase in deficits does not necessarily mean that the aim to balance the budget has lost its importance in the long term run.
According to the DIW Berlin, all elements of this strategy are to be put into effect if Germany and Europe wish to increase their employment rates.