Ifo Economic Forecast 2011/2012: Upswing Proceeds at a Slower Pace

The world economy started the current year with considerable dynamics, but in the second quarter global economic activity seems to have weakened. The Ifo World Economic Climate indicator has continued to rise, but only slightly and with considerable differences between countries and regions. Whereas despite some weakening since the second quarter of 2010 the expansion is still strong in the emerging economies, the advanced economies are displaying slower growth and most of them are undergoing a somewhat sluggish recovery. In the forecast period the world economic recovery will continue, but is expected to lose some of its speed. On the whole, the economic dynamics in the emerging economies will be much stronger than in the industrialised countries. World economic output is likely to grow by 4.2% in both this and in the coming year. In the euro area the economic recovery will continue at a moderate pace. In spite of savings measures in the public sector, the pace of economic expansion should speed up slightly during the coming year. Domestic demand will probably be the main factor behind this. All in all, it can be expected that GDP in the euro area will increase by 2.0% in 2011 and by 1.8% in 2012. However, the differences between the individual countries of the euro area will be considerable. In Germany the upswing continued in the last winter half year at a strong pace. The sharp decline in economic output as a result of the recent financial and economic crisis has now been made up for. The Ifo Business Climate indicator has surpassed even the peak levels of boom years 2006/07 for more than three-quarters of a year. Capacity utilisation in the manufacturing core, at 86%, is clearly above its long-term average. Current leading indicators point to a continuation of the upswing, but at a slower pace. GDP in 2011 will increase by 3.3% at a 67% confidence level by between 2.7% and 3.9% The number of unemployed will fall by nearly 300,000. In the coming year, economic activity in Germany should retain the pace it will have at the end of 2011 and will thus clearly point upwards. It is likely that the European Central Bank (ECB) will raise its rates slightly and the world economy weighted with the German export share – will slow marginally, with the result that investment growth will normalise somewhat during the course of the year. However, private consumption, boosted by increasing wages and growing job security, will gradually pick up. Overall, real GDP will expand by 2.3%. With all these factors, growth in employment will continue; on average for 2011, an increase of 490,000 employed people is expected. In the coming year, employment should increase by 315,000. Due to a growing labour supply, the number of unemployed people will not decrease in the same proportions. In 2011 a reduction of 295,000 and in 2012 of 260,000 is expected. The continuing increase in the output gap will gradually drive up core inflation. However, since the forecast assumes that raw material prices will remain constant and will thus no longer contribute to inflation in 2012, the result for consumer prices is an increase of 2.4% in the current year and only 2.1% next year. As a result of the strong economy and the consolidation efforts, the total budget deficit will decline from 82 billion euros last year to 38 billion euros this year. For 2012 a nearly balanced budget is expected. In relation to GDP, the deficit in 2011 will amount to 1.5%, and in the coming year to a likely 0.2%.