German Economy on the Brink of Recession

In autumn 2008, the word economy is in a downswing, caused by the commodity and energy price hike of the first half of the year, housing crises in the US and some other important countries, and in particular by the financial crisis that has recently intensified. The downswing will continue this year and for some time during 2009, and will only come to an end later next year if governments and central banks succeed in stabilizing financial markets in the coming months. In this case, lower prices of commodities and still high growth dynamics in important emerging markets countries will lead to a tentative revival of the world economy. The German economy is on the brink of a recession. It is particularly vulnerable to a global downswing because exports of investment goods are of upmost importance for the overall economy. Because the uncertainty about the worldwide effects of the financial crisis is very high, the forecast is split. A more probable scenario is based on the assumption of a stabilizing world economy. In this scenario, the growth rate of the German economy in 2009 is 0.2%. The second scenario is based on the assumption of a worldwide recession next year and forecasts that German GDP will shrink by 0.8% in 2009. Concerning policy, the institutes recommend a strengthening of the capital base of banks via injection of government money. This should be done in a way that gives incentives to banks for attracting additional capital from private sources. A special chapter of the report analyzes the nature and causes of the price hikes of energy and commodities in the first half of 2008.

10. October 2008

Authors ifo Institut München IfW Kiel IWH RWI Essen

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