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Die Lage der Weltwirtschaft und der deutschen Wirtschaft im Frühjahr 2003

Press Release of April 15, 2003

The global economy is in the midst of a phase of weakness. In line with the escalation of the Iraq conflict and, related to it, the increasing world-wide uncertainty regarding economic and geopolitical developments, the economic recovery has stalled once again. In nearly all industrial countries, but also in the newly industrialising economies and the countries of Central and East-ern Europe, growth of real Gross Domestic Product (GDP) has slowed during the winter half year. In the United States this underlying trend was eclipsed by the spending on the Iraq War.
The present forecast is based on the assumption that the situation in Iraq will calm down during spring. The uncertainty and its paralysing effects will then abate, oil prices will decline, stock markets and the exchange rate of the dollar will stabilise. In this environment, the expansionary monetary policy will increasingly develop its effects, and economic activity will firm in the fur-ther course of the year. Nonetheless, the upward trend in the industrial countries remains rela-tively restrained. This is partly due to the fact that, with the exception of the United States, there is nowhere an impetus from fiscal policy. In addition, there is the need for consolidation in the private sector in view of the prolonged poor profit situation of firms and the high indebtedness of private households in many countries. In the course of next year, at the earliest, GDP will in many regions expand a little faster than potential output.
The German economy remains in a phase of prolonged weakness. Since the middle of 2000, the economy has moved through alternative tendencies of recession and stagnation and, at best, phases of subdued recovery. Capacity utilisation has declined throughout. In 2002, real GDP has hardly grown. The slack in the economy has increasingly had its effects on the labour market. Thus, the decline in employment has accelerated since the middle of last year, and unemploy-ment has recently surged. Price increases have remained modest; year on year, the rate of infla-tion amounted to 1.2 % in March.
The recovery of the world economy will noticeably stimulate the German economy, via exports and the directly and indirectly export dependent sectors on the one hand and via a general im-provement in business and consumer expectations on the other. Stimulus will also emanate from the expansionary monetary policy. The stimulating monetary policy is countered by the appre-ciation of the euro, however. The effects resulting from the appreciation will be felt for some time yet. Next year its negative effects will abate; no further appreciation of the euro is as-sumed.
Fiscal policy is subject to considerable consolidation pressure. At the end of last year, the Fed-eral Government decided on a number of measures to push the deficit ratio below 3 % this year. Even if these will not become fully effective, this year’s fiscal policy is designed to be clearly restrictive. However, the automatic stabilisers will prevent the deficit from declining much; it will remain markedly above 3 %. From today’s vantage point, the deficit is expected to decline in 2004 because of somewhat improved economic activity despite the fact that the second stage of the tax reform, which was postponed to 2004, will become effective as planned.
Against this background, an economic recovery may be expected to start in Germany in the sec-ond half of this year. It will proceed only slowly, however. All in all, real GDP will rise by 0.5 % this year. Aggregate capacity utilisation will continue to decline, and the state of the labour market will deteriorate further. Although the recovery will firm next year and domestic demand will rise slightly, economic growth in Germany will still lack dynamism in 2004. From a purely cyclical point of view, real GDP growth would average 1¼ %. Account must be taken of the fact, however, that 2004 is a leap year and that many official holidays happen to fall on week-ends so that an extraordinarily large number of working days will be available. This will be re-flected in higher output. The effect of the higher number of working days amounts to more than ½ percentage point, resulting in total growth of real GDP of 1.8 % in 2004.
The growth trend in Germany is comparatively low. That is why the present reform efforts, that are to push Germany onto a higher growth path, are to be welcomed in principle. The measures announced in “Agenda 2010” point in the right direction. But they can only be a beginning. The promise made by Chancellor Schröder, that the tax reductions announced for the next two years will definitely become effective , is to be welcomed. In addition, it should be announced that the tax burden will not be increased. This should also apply to social security contributions in com-ing years.
It is important to announce concrete steps as to how the goal of budget consolidation is to be achieved. The institutes agree on the goal of a balanced budget in the medium term. They also emphasise that budget consolidation should be achieved via the expenditure side. An austerity policy need not, as frequently argued, result in a decline of growth promoting government in-vestments; on the contrary, these should even be increased. Above all, investment in human capital must be expanded. The creation of human capital is an important growth factor because it raises productivity. At the moment, it is the local communities that are facing the problem of not being able to invest enough. Safeguarding their ability to invest requires a reform of local finance. At the centre is the need to increase the financial strength of the local communities by raising their tax capacity; at the same time their tax revenues must be made less sensitive to cy-clical influences.
In order to carry out budget consolidation with success, the systems of social security must also be reformed. At the centre should be an enhancement of the efficiency of social security, not a cut in benefits.