Die Lage der Weltwirtschaft und der deutschen Wirtschaft im Herbst 2004
Press Release of October 19, 2004
The word economy continues to be strong, but since spring 2004 the upswing has been losing some of its momentum, partly because economic policies have become less ex-pansive. Although the monetary conditions remained highly supportive, fiscal impulses in the US have diminished and the other global driving force, China, has been taking administrative steps to cool off the economy. In addition, the high oil prices have further hampered economic activity; up to now they have reached new record levels. Especially private consumption was negatively affected by the oil market developments. On the other hand, corporate investment, supported by the still expansive monetary policy, has gained more and more momentum and has been expanded vigorously. Throughout the forecasting period, in the face of increased economic activity, monetary policy will adhere to its slow tightening path, but will continue to support the economy, albeit to a decreasing degree. In addition, no more stimuli from fiscal policy can be ex-pected for 2005 in the US, where economic activity will expand at a slower rate. In Ja-pan, weaker exports will be counteracted by stronger domestic demand. The compara-tively modest economic expansion in the European Union will continue. Overall world GDP should increase by 3.2 % in 2005, after rising by 3.9 % this year. The economy seems to be strong enough to weather the negative effects of the strong oil prices gains and the reduction of economic policy stimuli. Hence, as long as oil prices do not in-crease much further, a decline into recession is not expected.
In Germany, the economy has noticeably gained strength in the first half of 2004. Still, in comparison to former recoveries, its momentum continues to be subdued. So far im-pulses for the economy have solely come from the vigorous upswing in the rest of the world. In contrast, domestic demand has failed to benefit from these stimuli and has remained weak for an unusually long period of time. For the forecasting period, the in-stitutes expect the external impulses to gradually abate, as the global economy, induced by weaker expansions in the US and China, loses some of its momentum. While domes-tic demand in Germany will improve somewhat, it will not be able to compensate for the weaker foreign demand. Especially private consumption will continue to expand only at a modest pace. Although, initially in 2005, the tax reform and slightly improved job market perspectives will support it, subdued consumer expectations and still high oil prices will depress consumer expenditure. In contrast, investment in equipment and software will grow faster, as continuously favourable world markets, low interest rates, slow wage increases and successful consolidations on the business level will improve investment profitability. Construction spending, on the other hand, will continue to de-cline until the end of 2005. According to the forecast of five institutes, German GDP will expand by 1.5% next year, after 1.8% in 2004. In contrast, the DIW Berlin expects a gain of 2% for 2005 and hence does not share the other institutes’ opinion of a slow-ing rate of growth in 2005, but expects a slight acceleration in economic activity.
So far the overall economic recovery has not reached the job market. Although em-ployment has been rising since the beginning of this year, this can mostly be attributed to new job market instruments like mini-jobs and the so-called “Ich-AGs”, an incentive for the unemployed to move into self-employment. At the same time, the number of “regular” jobs, which pay social security benefits, continued to decline and unemploy-ment rose notably. As the economy continues to improve, so will job market opportuni-ties. But, considering the moderate pace of economic expansion, as expected by the ma-jority of the institutes, the job market recovery will only be measured and the decline in “regular” jobs, paying social security benefits, will not stop until late 2005. Overall em-ployment will continue to rise, though, as the new job market instruments will remain effective especially in the low-wage and temporary jobs segment. Unemployment will decline slightly.
In spite of the ongoing recovery, Germany will not overcome its weak growth perspec-tives. Economic policy should increase efforts to improve this situation. The Agenda 2010 with its labour market as well social security reforms is a step in the right direc-tion. But as the effects of such reforms only gradually unfold, early results should not be expected.
In the past years the German government has started to adjust its labour market policies. Parts of the instruments introduced in 2003 have been called upon more frequently than initially expected, but this alone cannot be a measure of their success. For example, the high degree of demand for these instruments has not materialised in an increase in total hours worked, whose declining trend will at most be slowed down by the reforms; the new instruments will hardly be able to stop the decline in “regular” jobs, paying social security benefits. The first job market has to re-enter the focus of attention of labour market policies. If this fails to happen, there is a substantial risk that the government will have to permanently subsidise a growing segment of the job market, a situation, which from a regulative policy point of view, is highly questionable and will not induce increased growth and employment.
According to five institutes, wages remain one of the main critical issues of the first job market. In order to stabilise employer’s expectations, the labour unions should an-nounce a credible medium-term policy of modest wage increases. Furthermore, they should refrain from the attempt to re-adjust the distribution of income, if the rising prof-its of an upswing should appear to increase the share of capital income. It might be a sensible rule of thumb to increase wages by less than the sum of the rate of labour pro-ductivity growth and expected inflation. This approach discounts, the effects of administered prices and shifts in the terms of trade, as well as an amount accounting for the labour productivity of lost employment. Such a policy will give the market forces more freedom to manoeuvre, wages will be able to adapt more freely and the currently negative wage drift will get smaller or even diminish.
Once more, fiscal policy in Germany has failed to fulfil its promises. Although some measures supporting growth and employment have recently been taken, the government is still lacking a coherent, well-defined and growth-promoting concept. Instead there is the impression of a collection of separate measures, partly adopted as a reaction to dete-riorating public finances.
The budget deficit is expected to reach 83 billion Euro (3.8% of nominal GDP). Al-though this figure should reduce to 78 billion Euro (3.5% of nominal GDP) next year, the upper limit of the Stability and Growth Pact will be violated for the fourth consecu-tive year, if no further measures should be taken. The institutes agree that there is a con-siderable need for consolidation and that the Stability Programme 2004 should contain a binding plan for consolidation. Furthermore, all institutes prefer cutting outlays to in-creasing receipts as the appropriate approach to lowering the budget deficit. But differ-ent opinions exist about whether deficit targets or a binding spending path represent the most suitable guideline for consolidation, whose term-structure the institutes could not agree upon either. The majority of the institutes (RWI Essen, HWWA Hamburg, IfW Kiel and ifo München) suggest increasing consolidation efforts in order to reach a defi-cit of 3 % of nominal GDP by the end of the coming year. They propose a programme of spending cuts. A reform of the Stability and Growth Pact is not deemed necessary. In contrast, the DIW Berlin and the IWH argue that a reform of the pact does not imply loosening or even abandoning the consolidation efforts. As has been mentioned in ear-lier joined forecasts, the DIW Berlin and the IWH remain firm in their opinion that the pact needs to undergo a thorough reform, with a binding spending path as the main measure of consolidation.
Monetary policy continues to stimulate the economy in the euro area as well as in Ger-many. Despite the increased rate of inflation in the wake of high oil prices, the ECB should not change its policy stance as long as no signs emerge, that the higher energy prices provoke wage increases and that a wage-price spiral evolves. But as the economic recovery continues to unfold, the bank should signal vigilance when in 2005 the recov-ery will be well entrenched; increasing interest rates by a ¼ percentage point will then be appropriate as the risks, associated with the past downturn have, at least in part, di-minished. The inflation rate is expected to drop below the 2 %-mark by spring 2005.
The DIW Berlin disagrees with the other institutes on economic policy. It considers weak demand as the decisive factor for the slow economic growth and the high rates of unemployment of the recent past. According to the DIW Berlin, so far economic policy has not reacted appropriately, and thus deteriorated the situation even further.
So far the overall economic recovery has not reached the job market. Although em-ployment has been rising since the beginning of this year, this can mostly be attributed to new job market instruments like mini-jobs and the so-called “Ich-AGs”, an incentive for the unemployed to move into self-employment. At the same time, the number of “regular” jobs, which pay social security benefits, continued to decline and unemploy-ment rose notably. As the economy continues to improve, so will job market opportuni-ties. But, considering the moderate pace of economic expansion, as expected by the ma-jority of the institutes, the job market recovery will only be measured and the decline in “regular” jobs, paying social security benefits, will not stop until late 2005. Overall em-ployment will continue to rise, though, as the new job market instruments will remain effective especially in the low-wage and temporary jobs segment. Unemployment will decline slightly.
In spite of the ongoing recovery, Germany will not overcome its weak growth perspec-tives. Economic policy should increase efforts to improve this situation. The Agenda 2010 with its labour market as well social security reforms is a step in the right direc-tion. But as the effects of such reforms only gradually unfold, early results should not be expected.
In the past years the German government has started to adjust its labour market policies. Parts of the instruments introduced in 2003 have been called upon more frequently than initially expected, but this alone cannot be a measure of their success. For example, the high degree of demand for these instruments has not materialised in an increase in total hours worked, whose declining trend will at most be slowed down by the reforms; the new instruments will hardly be able to stop the decline in “regular” jobs, paying social security benefits. The first job market has to re-enter the focus of attention of labour market policies. If this fails to happen, there is a substantial risk that the government will have to permanently subsidise a growing segment of the job market, a situation, which from a regulative policy point of view, is highly questionable and will not induce increased growth and employment.
According to five institutes, wages remain one of the main critical issues of the first job market. In order to stabilise employer’s expectations, the labour unions should an-nounce a credible medium-term policy of modest wage increases. Furthermore, they should refrain from the attempt to re-adjust the distribution of income, if the rising prof-its of an upswing should appear to increase the share of capital income. It might be a sensible rule of thumb to increase wages by less than the sum of the rate of labour pro-ductivity growth and expected inflation. This approach discounts, the effects of administered prices and shifts in the terms of trade, as well as an amount accounting for the labour productivity of lost employment. Such a policy will give the market forces more freedom to manoeuvre, wages will be able to adapt more freely and the currently negative wage drift will get smaller or even diminish.
Once more, fiscal policy in Germany has failed to fulfil its promises. Although some measures supporting growth and employment have recently been taken, the government is still lacking a coherent, well-defined and growth-promoting concept. Instead there is the impression of a collection of separate measures, partly adopted as a reaction to dete-riorating public finances.
The budget deficit is expected to reach 83 billion Euro (3.8% of nominal GDP). Al-though this figure should reduce to 78 billion Euro (3.5% of nominal GDP) next year, the upper limit of the Stability and Growth Pact will be violated for the fourth consecu-tive year, if no further measures should be taken. The institutes agree that there is a con-siderable need for consolidation and that the Stability Programme 2004 should contain a binding plan for consolidation. Furthermore, all institutes prefer cutting outlays to in-creasing receipts as the appropriate approach to lowering the budget deficit. But differ-ent opinions exist about whether deficit targets or a binding spending path represent the most suitable guideline for consolidation, whose term-structure the institutes could not agree upon either. The majority of the institutes (RWI Essen, HWWA Hamburg, IfW Kiel and ifo München) suggest increasing consolidation efforts in order to reach a defi-cit of 3 % of nominal GDP by the end of the coming year. They propose a programme of spending cuts. A reform of the Stability and Growth Pact is not deemed necessary. In contrast, the DIW Berlin and the IWH argue that a reform of the pact does not imply loosening or even abandoning the consolidation efforts. As has been mentioned in ear-lier joined forecasts, the DIW Berlin and the IWH remain firm in their opinion that the pact needs to undergo a thorough reform, with a binding spending path as the main measure of consolidation.
Monetary policy continues to stimulate the economy in the euro area as well as in Ger-many. Despite the increased rate of inflation in the wake of high oil prices, the ECB should not change its policy stance as long as no signs emerge, that the higher energy prices provoke wage increases and that a wage-price spiral evolves. But as the economic recovery continues to unfold, the bank should signal vigilance when in 2005 the recov-ery will be well entrenched; increasing interest rates by a ¼ percentage point will then be appropriate as the risks, associated with the past downturn have, at least in part, di-minished. The inflation rate is expected to drop below the 2 %-mark by spring 2005.
The DIW Berlin disagrees with the other institutes on economic policy. It considers weak demand as the decisive factor for the slow economic growth and the high rates of unemployment of the recent past. According to the DIW Berlin, so far economic policy has not reacted appropriately, and thus deteriorated the situation even further.
