Die Lage der Weltwirtschaft und der deutschen Wirtschaft im Frühjahr 2005
Press Release of April 26, 2005
In the course of 2004, world economic growth has decelerated. The growth momentum, however, remained substantial due to favorable financing conditions, high corporate profits and increasing asset prices which supported private demand in the global economy. Several factors have been responsible for the slowdown. The strong increase in commodity prices reduced purchasing power in the industrial countries. In Japan and in the euro area in addition the appreciation of the yen and the euro, respectively, dampened exports substantially. Finally, in some countries, notably the United States and China, economic policies were less stimulative than before. Although it can be expected that the prices of crude oil and other commodities will remain high for some time to come, that monetary policy in the United States will be gradually tightened further and that long term interest rates will start rising on a global scale, the outlook is for continued growth in the world economy in 2005 and 2006 at around the pace seen in the second half of last year. Monetary conditions will still be accommodative and high corporate profits remain supportive to economic growth as does the strong underlying growth momentum in the emerging market economies. The growth differences between the industrial countries will gradually decline.
Output in the euro area, which has slowed considerably since mid-2004, will continue to expand moderately over the coming months. Domestic demand is likely to almost stagnate due to the dampening effects of higher oil prices and the bleak situation on the labor market. Exports will also show little vigor for the time being. In the second half of this year, however, the economy is expected to start to improve. With the negative impact from oil prices fading, private consumption will pick up. Corporate investment should strengthen on the back of an improved outlook for sales and profits. In addition, on the assumption of a stable exchange rate, the dampening effect from the appreciation of the euro will fade out, lending support to exports. All in all, real GDP in 2005 is forecast to rise by 1.4 %. Next year, the recovery is expected to gain some more momentum with private consumption accelerating in response to declining unemployment. With capacity utilization on the rise and profits having increased further, the attitude of firms toward investments should improve. Real GDP is projected to advance by 2.0 %. Consumer price inflation will decline only slightly this year as upward pressure from energy prices will subside only gradually. On average, the HICP will increase by 2.0 % in 2005, followed by a more moderate 1.6 % next year.
The German economy is currently in a weak spot. The recovery which had been remarkably strong in the first half of 2004 came to a standstill. Main factors have been the slowdown in the world economy on the one hand and the euro appreciation on the other hand which led to a substantial deceleration of exports. Domestic demand remained weak, the underlying cyclical momentum continued to be slow. Even the previous massive stimulus from external demand did not result in a sustained recovery; domestic final demand only stabilized in 2004 after having declined for three successive years. In hardly any other country of the European Union, economic growth has been that disappointing over recent years. Evidently, the German economy suffers from a fundamental weakness. On the labor market, the situation continued to deteriorate from a cyclical point of view. While the total number of employees rose as a result of labor market policy measures, regular employment which is a better gauge of underlying labor market trends continued to shrink. Unemployment continued to rise, with the number of registered unemployed having jumped after the turn of the year due to the inclusion of former recipients of social assistance in the context of implementing the so-called Hartz IV labor market reforms.
In the first half of 2005, the underlying growth momentum will remain limited. The order inflow to industry which had increased strongly around the turn of the year due to large scale orders have declined again more recently. Latest sentiment indicators suggest that the economy may still have to find bottom; business expectations continued to tend downwards. An important reason for the increasing pessimism may be the rise in oil prices which dents into corporate profits and reduces real incomes of private households. All in all, domestic demand is expected to increase only modestly for the time being. Exports will also lack momentum, as growth abroad will be dampened by higher energy prices as well.
The Institutes expect the current phase of cyclical weakness to be gradually overcome in the remainder of the year. The economic environment by then will have improved and be generally supportive for a cyclical recovery. The dampening impact from higher oil prices will gradually fade and the detrimental impacts of last year’s currency appreciation will subside. At the same time, the world economy will continue to expand at a solid pace. Against this background, exports will accelerate and with price competitiveness improving German exporters should be able to slightly increase their share in the world markets. Domestic demand is supported by continued low interest rates. Next year, the recovery will gain some strength, and the growth rate of real GDP will surpass the trend rate of growth which is in the neighborhood of 1 %. Consequently, the output gap estimated to currently be at around 1 % will decline.
Real GDP will rise by only 0.7 % this year, according to the forecast of the Institutes (Table); adjusted for the number of working days the rate of growth amounts to 0.9 %. In 2006, output will increase by 1.5 %. Unemployment will be affected significantly by the implementation of Hartz IV reforms for some time to come. The number of unemployed is expected to fall substantially in the second half of 2005 and in 2006. At the same time, employment will improve only slightly.
In the years 2001–2004, average growth of the German economy has been a mere 0.6 %. In the public debate this is often regarded as the result of a particularly weak cyclical development calling for economic policy measures that stimulate demand in the short term. The Institutes, by contrast, have repeatedly argued that they see a decline in the trend rate of growth as the fundamental cause. This hypothesis is investigated empirically in the current report. It is found that the German trend growth rate has declined consistently to 1.1 % since the early 1990s, while at the same time trend growth in the euro area (ex Germany) and in the US has remained largely stable over the past 30 years at rates of slightly above 2 % and 3 %, respectively. Hence, the international comparison reveals that the growth performance has been relatively poor not only in recent years, after the turn of the century, but over a period of some 15 years.
The conclusion that the German growth problem is not cyclical but structural in nature seems to have more and more entered the minds of economic agents. They expect only slow growth of incomes for the future and, as a consequence, are cautious in their consumption and investment decisions. Already today, real incomes of a significant share of the population are falling. To find a solution to the growth problem is therefore one of the most pressing challenges currently facing economic policy. Far reaching reform measures in many areas are called for in order to improve the conditions for growth. The principal direction of reforms should be clear: The government has to reduce its influence on economic decisions and the share of government in GDP, while the scope for private initiative should be increased. The government should strengthen the self responsibility of individuals and provide only a basic social insurance. In this process, the efficiency of public expenditures has to be enhanced and competition as a coordination mechanism has to be strengthened.
Despite a number of initiatives which have been started in recent years, no coherent concept designed to tackle the growth problem is visible. Isolated reform measures, often too timid anyway, cannot lead a long way, they can even make things worse. It is not surprising that labor market schemes promoting self employment (“Ich-AGs”) and mini jobs are increasingly used to lower labor costs in some sectors, since labor market regulations and rigid wage contracts prevent other forms of flexibilization. It has also be held in mind that changes in one area may force successive changes in some other areas. For example, deregulation and opening of the labor market often lead to declining wages. Redistribution which is necessary to secure a subsistence level of income for low wage earners should take place through the tax-transfer system which is more efficient than utilizing the social insurance system. Even if self responsibility is given a higher priority, the latter system then has to provide a basic insurance against illness/disability and unemployment and a basic old age pension for those with very low incomes.
The problem of weak growth in Germany can be solved, even in a relatively short period of time, if a redirection of economic policies is successful. This is exemplified by the experience in a number of countries, such as Ireland, Finland or Great Britain, which have implemented a policy turn in the past. And there is the example of Germany in the 1980s showing that higher trend growth is possible as a result of successful consolidation of the public finances in combination with tax reductions and supported by moderate wage increases.
The German economy is currently in a weak spot. The recovery which had been remarkably strong in the first half of 2004 came to a standstill. Main factors have been the slowdown in the world economy on the one hand and the euro appreciation on the other hand which led to a substantial deceleration of exports. Domestic demand remained weak, the underlying cyclical momentum continued to be slow. Even the previous massive stimulus from external demand did not result in a sustained recovery; domestic final demand only stabilized in 2004 after having declined for three successive years. In hardly any other country of the European Union, economic growth has been that disappointing over recent years. Evidently, the German economy suffers from a fundamental weakness. On the labor market, the situation continued to deteriorate from a cyclical point of view. While the total number of employees rose as a result of labor market policy measures, regular employment which is a better gauge of underlying labor market trends continued to shrink. Unemployment continued to rise, with the number of registered unemployed having jumped after the turn of the year due to the inclusion of former recipients of social assistance in the context of implementing the so-called Hartz IV labor market reforms.
In the first half of 2005, the underlying growth momentum will remain limited. The order inflow to industry which had increased strongly around the turn of the year due to large scale orders have declined again more recently. Latest sentiment indicators suggest that the economy may still have to find bottom; business expectations continued to tend downwards. An important reason for the increasing pessimism may be the rise in oil prices which dents into corporate profits and reduces real incomes of private households. All in all, domestic demand is expected to increase only modestly for the time being. Exports will also lack momentum, as growth abroad will be dampened by higher energy prices as well.
The Institutes expect the current phase of cyclical weakness to be gradually overcome in the remainder of the year. The economic environment by then will have improved and be generally supportive for a cyclical recovery. The dampening impact from higher oil prices will gradually fade and the detrimental impacts of last year’s currency appreciation will subside. At the same time, the world economy will continue to expand at a solid pace. Against this background, exports will accelerate and with price competitiveness improving German exporters should be able to slightly increase their share in the world markets. Domestic demand is supported by continued low interest rates. Next year, the recovery will gain some strength, and the growth rate of real GDP will surpass the trend rate of growth which is in the neighborhood of 1 %. Consequently, the output gap estimated to currently be at around 1 % will decline.
Real GDP will rise by only 0.7 % this year, according to the forecast of the Institutes (Table); adjusted for the number of working days the rate of growth amounts to 0.9 %. In 2006, output will increase by 1.5 %. Unemployment will be affected significantly by the implementation of Hartz IV reforms for some time to come. The number of unemployed is expected to fall substantially in the second half of 2005 and in 2006. At the same time, employment will improve only slightly.
In the years 2001–2004, average growth of the German economy has been a mere 0.6 %. In the public debate this is often regarded as the result of a particularly weak cyclical development calling for economic policy measures that stimulate demand in the short term. The Institutes, by contrast, have repeatedly argued that they see a decline in the trend rate of growth as the fundamental cause. This hypothesis is investigated empirically in the current report. It is found that the German trend growth rate has declined consistently to 1.1 % since the early 1990s, while at the same time trend growth in the euro area (ex Germany) and in the US has remained largely stable over the past 30 years at rates of slightly above 2 % and 3 %, respectively. Hence, the international comparison reveals that the growth performance has been relatively poor not only in recent years, after the turn of the century, but over a period of some 15 years.
The conclusion that the German growth problem is not cyclical but structural in nature seems to have more and more entered the minds of economic agents. They expect only slow growth of incomes for the future and, as a consequence, are cautious in their consumption and investment decisions. Already today, real incomes of a significant share of the population are falling. To find a solution to the growth problem is therefore one of the most pressing challenges currently facing economic policy. Far reaching reform measures in many areas are called for in order to improve the conditions for growth. The principal direction of reforms should be clear: The government has to reduce its influence on economic decisions and the share of government in GDP, while the scope for private initiative should be increased. The government should strengthen the self responsibility of individuals and provide only a basic social insurance. In this process, the efficiency of public expenditures has to be enhanced and competition as a coordination mechanism has to be strengthened.
Despite a number of initiatives which have been started in recent years, no coherent concept designed to tackle the growth problem is visible. Isolated reform measures, often too timid anyway, cannot lead a long way, they can even make things worse. It is not surprising that labor market schemes promoting self employment (“Ich-AGs”) and mini jobs are increasingly used to lower labor costs in some sectors, since labor market regulations and rigid wage contracts prevent other forms of flexibilization. It has also be held in mind that changes in one area may force successive changes in some other areas. For example, deregulation and opening of the labor market often lead to declining wages. Redistribution which is necessary to secure a subsistence level of income for low wage earners should take place through the tax-transfer system which is more efficient than utilizing the social insurance system. Even if self responsibility is given a higher priority, the latter system then has to provide a basic insurance against illness/disability and unemployment and a basic old age pension for those with very low incomes.
The problem of weak growth in Germany can be solved, even in a relatively short period of time, if a redirection of economic policies is successful. This is exemplified by the experience in a number of countries, such as Ireland, Finland or Great Britain, which have implemented a policy turn in the past. And there is the example of Germany in the 1980s showing that higher trend growth is possible as a result of successful consolidation of the public finances in combination with tax reductions and supported by moderate wage increases.
