The Outlook for the European and the German Economy

Transcription

1 The Outlook for the European and the German Economy Annual Economic Forum of the German American Chamber of Commerce Chicago January 26, 2012 Joachim Scheide, Kiel Institute for the World Economy

2 Once again a synchronous downturn in the world economy There is a slowdown in emerging economies which is even welcome because of the risk of overheating and higher inflation. In contrast, many of the advanced economies are in a recession, especially in Europe which is severely hit by the sovereign debt crisis. Where do we stand? So far, the recovery after the crisis has been as sluggish as suggested by experience in earlier crises: This time is not different! One major exception may be Germany: It looks like a recovery after a normal recession, and unemployment is even lower than before the crisis. 2

3 The IfW-Indicator for economic activity: A sharp slowdown in the world economy 8 Percent Index GDP Indicator (rhs)

4 Recovery of real GDP after the crisis: United States The typical pattern 115 Index 110 Trend GDP Quarter 4

5 Recovery of real GDP after the crisis: Euro Area Also the typical pattern, in some countries even worse! 115 Index 110 Trend GDP Quarter 5

6 Recovery of real GDP after the crisis: Germany More like the pattern after a normal recession 115 Index Trend 100 GDP Quarter 6

7 Germany is (still) doing better than the rest of the Euro Area Stock prices and confidence indicators have collapsed in Germany as well, but firms and consumers are not as depressed as elsewhere in Europe. A recession in the Euro Area seems inevitable at this point. For Germany, several fundamentals will remain quite positive: 1. Strong competitiveness and big market share in emerging economies. 2. The reforms still have effects so that the labor market remains robust. 3. Interest rates are extremely low for Germany given the situation. 4. Fiscal policy does not have to be very restrictive like elsewhere. On the negative side: Prices and wages are rising faster than elsewhere. 7

8 Euro Area surveys: German firms are less pessimistic 2 Index Germany Euro Area without Germany Euro Area

9 GDP in the Euro Area: A recession is very likely =100 QoQ annualized growth rate Level (chain index) Percent Forecast I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

10 And in Germany, a recession may just be avoided =100 QoQ annualized growth rate Level (chain index) Percent Forecast I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV

11 Change of real GDP in the European Union: Germany is still in a relatively good position Germany France Italy Spain Euro Area Britain EU

12 Nevertheless: Germany is hit by lower export demand Indicators such as business expectations have deteriorated as much as in 2008 when a recession was predicted even before the Lehman crisis. While investment and consumption are relatively robust, exports have stagnated recently due to the recession in the rest of the Euro Area. This is only partly compensated by emerging economies which have slowed down as well. In addition, financial stress is almost at its peak: While interest rates are low, high uncertainty and high volatility are a warning! The risk of a recession in Germany is about 40 %. 12

13 Business expectations before the Lehman crash and today 40 Index October 2005 until September January 2009 until December

14 IfW-Indicator for exports: Strong downturn 25 Percent Index YoY export growth rate World production expectations (rhs)

15 IfW-Indicator for financial market stress in Germany 6 Index 5 Great Recession Recession 1982 Stock market crash 1987 EMS crisis Russian crisis Dotcom bubble Debt crisis

16 Medium term: No miracle, but rather more risks! While the outlook for the near term is relatively positive, there is no reason to be overly optimistic for the German economy in the coming years. In the medium term, economic growth will average only 1 ¼ percent per year. True: Labor market reforms have led to an increase of labor input. But because other reforms are absent, productivity growth remains sluggish. On top of that, two things have changed since last year: 1. Tax increases are more likely given the bailout in the Euro Area. 2. The turnaround of climate policy is a negative shock for growth. 16

17 The big risk for the outlook Whether the forecast is roughly correct depends crucially on the debt crisis. Here is the bet: The governments and the ECB say: All government bonds are absolutely safe! The markets say something else who is right? Should the markets be right or will governments not be able to deliver the promises, there will be a severe recession. It would even be more drastic now that the ECB has flooded the markets so that banks should buy large amounts of government bonds. 17

18 The situation in the Euro Area is still dramatic The second wave of the financial crisis: Government failure on a grand scale. Before the crisis, fiscal rules were almost completely ignored after During the crisis, promises and actions were neither credible nor sustainable: No insolvency, no private sector liability, liquidity support only transitory etc. The sovereign debt crisis is now a banking crisis and a political crisis as well. The bailout failed, so the response is: We need even bigger funds (ESM etc.). Obviously, the philosophy still is to rescue the euro whatever it costs! 18

19 Bond yields in the Euro Area are still very high 40 Percent Austria Finland Germany Ireland Netherlands Spain Belgium France Greece Italy Portugal

20 Banking crisis: High CDS premiums for European banks Basis points Sovereign debt crisis Lehman crisis

21 What should be done in the problem countries? There is no alternative to austerity : What would happen if Greece or Italy tried to launch stimulus packages? The goal is to regain confidence which would lead to lower interest rates. This will be more likely if the governments show that economic reforms are possible, even if their positive effects show up only in the medium term. Since everything is political, it is best if the incentive for reforms comes from markets via high interest rates, not from moral suasion by governments. This was obvious when the ECB started to buy bonds: The reforms stalled. 21

22 The ECB in a dilemma inflation as the ultimate solution??? With unsuccessful governments, the ECB was obviously the only institution which could do something, so they gave in (and Weber and Stark left!). Many argue that the ECB should buy all bonds with higher risk: The bazooka! But this would be the very last option: What if it does not work? If markets are really nervous, can we be sure that they calm down when the ECB buys all government bonds and acts against the Maastricht Treaty? The risk is that the credibility goes down and inflationary expectations go up. Higher inflation will not be accepted by the citizens (not only Germans). This would probably mean the end of the monetary union!!! 22

23 Pragmatism versus principles of economic policy Critics of the current bailout strategy are called dogmatic, not helpful or even counterproductive. But they are not saying as some want to make us believe that the euro should collapse. The opposite is true! We have to remember what we decided to have: A monetary union, and not a fiscal union, a transfer union or something else. So the alternative which is still feasible is: Back to the Maastricht Treaty! 23

24 Huge risks of the bailout philosophy If the bailout fails, there could be a disaster: Even the now strong countries would be downgraded so that they will not be able to save the others. In the end, the debt situation in the entire EMU would be worse: Higher interest rates everywhere, and probably a political disaster as well. And: We should not forget that leveraging can lead to bad results remember the first wave of the financial crisis? 24

25 Thank you for your attention! 25