The Results of the Autumn 2012 Joint Economic Forecast - Risks for the German Economy

Despite the strains of the European debt crisis, Germany's economy has remained fairly stable relative to other eurozone countries. This is the conclusion of the latest Joint Economic Forecast (or Gemeinschaftsdiagnose), a biannual economic assessment issued by leading research institutes in the German-speaking world. Dr. Marcus Kappler, chief ZEW researcher involved in drafting the report, answers our questions.

Marcus Kappler studied economics at the universities of Tübingen and Maryland (USA) and obtained his doctorate from Goethe University Frankfurt in 2007. He has been employed at ZEW since 2002, where he is deputy head of the Growth and Business Cycles research group. His research focuses on the accuracy of economic forecasts, on structural unemployment, and on the factors that influence potential output.

The eurozone is in recession, yet the authors of the Joint Economic Forecast project that German GDP will grow by 0.8% this year and by 1.0% next year. What is the reason for their optimism?

Growth projections since the spring report have actually been halved. The economic forecasts for Germany have dimmed over the last six months first and foremost because of the weak state of the global economy this autumn. Firms and households also remain nervous about the continuing tremors of the European debt crisis. However, the Joint Economic Forecast projects that the situation in Europe will gradually ease and that the global economy will pick up again. And if the economy improves, Germany is likely to profit from historically low interest and bond rates, which will stimulate investment as soon as business expectations for revenues and profits recover.

The debt crisis in the eurozone has once again come to a head while the economy in the United States is faltering. What dangers do you see for Germany?

The projections for Germany were based on the belief that the situation in the eurozone will continue to stabilize over the forecast period as investors regain trust in the market. However, this is by no means certain. Should the situation in Europe worsen, Germany will certainly feel the low levels of demand from its trading partners. Under such conditions, the risk is great that Germany will slip into recession.

In response to the European debt crisis, the ECB has relaxed its monetary policy, lowering interest rates and – in an unparalleled step – purchasing government bonds from cash-strapped countries. Could Germany start to see inflation?

The institutes who compiled the report take a critical view of the ECB’s unrestricted bond-buying programme. Inflation could rise in the medium term if the ECB uses the programme for the monetary financing of government budgets. This in turn could erode trust in the ECB’s ability to stabilize prices in the long term. Sooner or later people’s inflationary expectations would come unmoored. What’s more, there is a large risk that the ECB will continue to purchase bonds even when non-adherence with the adjustment programme occurs, thus providing excessive monetary stimulation. This could drive up prices and raise inflationary expectations. And once the ECB losses its reputation for sound monetary policy, establishing it again would take time, and would be accompanied by more restrictive policies. As a consequence, ensuring price stability would entail high social costs.

The autumn 2012 Joint Economic Forecast:

Twice a year, in the spring and autumn, a team of leading economic research institutes prepares a report on the state of the economy for Germany’s Federal Ministry of Economics and Technology. Known as the Joint Economic Forecast, or Gemeinschaftsdiagnose, it provides a short-term outlook for Germany, Europe, and the world as a whole, in addition to offering economy policy recommendations and medium-term projections. The current team consists of researchers from the following institutes:

• The Ifo Institute for Economic Research (Munich)
• The KOF Swiss Economic Institute (Zurich)
• The Institute for the World Economy (Kiel)
• The Centre for European Economic Research (Mannheim)
• The Halle Institute for Economic Research (Halle)
•  Kiel Economics (Kiel)
•  Rheinisch-Westfälisches Institut für Wirtschaftsforschung(Essen)
•  The Institute for Advanced Studies (Vienna)