Germany, Europe's biggest economy, is poised for a full-year recovery in 2010 following its worst recession since the end of World War II in 1945, the country's main economic institutes said on Thursday.
Output in 2010 should reach 1.2%, the group said in its semi-annual report, which revised up a projection of minus 0.5% made in April. The fall in 2009 will be 5%.
"In the autumn of 2009, the lowest point of the worst global recession since World War II appears to be behind us. Much points to an economic recovery," the institutes said.
The institutes say that a major contributor to the turnaround in the global economy was the stabilisation on the financial markets that occurred in the early months of the year as a result of massive intervention of central banks as well as the announcement of state support programmes including guarantees for the financial sector. In the meantime, investors’ risk propensity has grown strongly, as indicated by the increase in prices on the international stock markets but also by the decrease in risk premiums on corporate bonds and on the
government bonds of the emerging economies. In the real economy the positive effects of government stimulus programmes are also being felt.
"However, experience with past phases of weak economies shows that recovery is usually slow in the case of recessions that are accompanied by bank and real-estate crises," the assessment says.
The institutes accordingly expect economic growth to be moderate worldwide in the coming year, since the problems in the international financial system have not yet been overcome. Moreover, the favourable effects of energy price developments on consumption and corporate profits in the industrial countries are reversing with an oil price of $75 a barrel, which is assumed in this forecast. In addition, the effects of fiscal-policy stimulus will weaken in the course of the coming year. Finally, in many countries employment has not yet adjusted to the clear declines in production. In Germany, even with a noticeable expansion in production, unemployment will rise for some time, which will have a dampening effect on disposable income and domestic demand.
Unemployment this year will rise to 8.0 % and 9.4 % in 2010 with just over four million Germans unemployed on average in 2010.
Last April, the institutes had forecast just under five million unemployed in 2010.
"Job cuts should reach their peak at the beginning of next year and continue with diminishing intensity until the end of the year,"the report said.
Chancellor Angela Merkel, who expects to form a government with her new right of centre coalition partners by October 23rd, said on Wednesday that the road ahead will be bumpy for Germany's economy but a recovery is on track.
The German government will today release its revised 2010 growth forecast
Tax cuts are being discussed by the centre right parties and the institutes said that, while tax cuts were “in principle possible,” these would have to be offset by “ambitious” cuts in government expenditure, in order to prevent an increase in Germany’s national debt and borrowing costs.
They warned that the tax cuts that are currently being discussed would prove to be very expensive in the long term if they are debt financed. Because of the increased debt, interest payments would grow and interest rates perhaps as well. For this reason any tax cuts
must be financed. This would be possible in principle, as the consolidation potential described by the institutes shows, but would presuppose a very ambitious savings policy.
The economists warned that Germany should not expect a “classic export led-recovery” in spite of a pick-up in overseas demand.
The institutes also warn that the recession will impose a considerable strain on public budgets. Lower taxes and revenue receipts face off with cyclically necessary increases in expenditure and the costs of the stimulus programmes. In 2009, the deficit ratio to GDP (gross domestic product) will increase to 3.2% just above the Euro Growth and Stability Pact limit of 3%.
In the coming year, expenditures will increase at a slower pace, but government revenues in the wake of tax cuts and declining employment will continue to fall. For 2010, the institutes expect a deficit rate of 5.2%.
Members of the Joint Economic Forecast project group:
