The State of the World Economy and the German Economy in the Spring of 2007

On 19 April 2007 the German economic research institutes presented their Joint Economic Forecast to the press in Berlin. They reported that the international economy is in an expansive phase. The growth dynamism in developing and threshold countries continues to be high, not least because of their stronger inclusion in the international division of labour. In the industrialised countries, however, the economic upswing has not been unusually strong. The slowdown in economic growth in the US has not yet affected other regions. The expansion in the euro area and Japan is continuing. During this year and next the pace of economic activity in the industrialised countries will gradually converge. In the euro area the upswing will be moderate since fiscal policy is dampening and monetary policy not stimulating economic growth. In the United States, however, the economy will slowly gather steam again from mid-year. In 2007 and 2008 the world economy will again be supported by the growth dynamics in the newly industrialising countries. World GDP is expected to grow by around 3¼% this year and next and thus markedly faster than the average of the past ten years. World trade will increase by about 7½% in both years. As in the autumn forecast, a risk for the world economy continues to be developments on the US housing market. If a sharp decline of housing prices were to greatly depress private consumption, investors' confidence in the dollar and in US assets would be likely to suffer - confidence on which the US economy depends because of its large demand for foreign capital. Via the interdependency of the financial markets and the large volume of US imports, a recession in the United States would quickly affect the world economy.