German Economy on the Brink of Recession
Wirtschaft im Wandel,
2. Sonderausgabe
2008
Abstract
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.
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Stages of the Ongoing Global Financial Crisis: Is There a Wandering Asset Bubble?
Lucjan T. Orlowski
IWH Discussion Papers,
No. 11,
2008
Abstract
This study argues that the severity of the current global financial crisis is strongly influenced by changeable allocations of the global savings. This process is named a “wandering asset bubble”. Since its original outbreak induced by the demise of the subprime mortgage market and the mortgage-backed securities in the U.S., this crisis has reverberated across other credit areas, structured financial products and global financial institutions. Four distinctive stages of the crisis are identified: the meltdown of the subprime mortgage market, spillovers into broader credit market, the liquidity crisis epitomized by the fallout of Bear Sterns with some contagion effects on other financial institutions, and the commodity price bubble. Monetary policy responses aimed at stabilizing financial markets are proposed.
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Stages of the Global Financial Crisis: Is There a Wandering Asset Bubble?
Lucjan T. Orlowski
Wirtschaft im Wandel,
No. 9,
2008
Abstract
This study argues that the severity of the current global financial crisis is strongly influenced by changeable allocations of the global excess liquidity. This process is named a “wandering asset bubble”. Since its original outbreak induced by the demise of the subprime mortgage market and the mortgage-backed securities in the U.S., this crisis has reverberated across other credit areas, structured financial products and global financial institutions. Four distinctive stages of the crisis are distinguished: the meltdown of the subprime mortgage market, spillovers into broader credit market, the fallout of Bear Sterns with some contagion effects on other financial institutions, and the commodity price bubble. Monetary policy responses aimed at stabilizing financial markets are proposed.
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Monetary Policy and Financial (In)stability: An Integrated Micro–Macro Approach
Ferre De Graeve, Thomas Kick, Michael Koetter
Journal of Financial Stability,
No. 3,
2008
Abstract
Evidence on central banks’ twin objective, monetary and financial stability, is scarce. We suggest an integrated micro–macro approach with two core virtues. First, we measure financial stability directly at the bank level as the probability of distress. Second, we integrate a microeconomic hazard model for bank distress and a standard macroeconomic model. The advantage of this approach is to incorporate micro information, to allow for non-linearities and to permit general feedback effects between financial distress and the real economy. We base the analysis on German bank and macro data between 1995 and 2004. Our results confirm the existence of a trade-off between monetary and financial stability. An unexpected tightening of monetary policy increases the probability of distress. This effect disappears when neglecting microeffects and non-linearities, underlining their importance. Distress responses are largest for small cooperative banks, weak distress events, and at times when capitalization is low. An important policy implication is that the separation of financial supervision and monetary policy requires close collaboration among members in the European System of Central Banks and national bank supervisors.
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Parenting Benefit – A New Risk for Companies
Nicole Nulsch, Henry Dannenberg
Wirtschaft im Wandel,
No. 7,
2008
Abstract
One of the aims of the new parenting benefit – introduced by the German government in January 2007 – is to motivate fathers to take parental leave in order to take care of their young children. Until now, the effects of the parenting benefit have been discussed predominantly from the viewpoint of family policy. In contrast, this paper analyses how companies are affected by the new law. In 2007, the number of fathers who stayed at home to spend more time with their children increased significantly. More than half of the working applicants were already fathers. In the past, it was easy for companies to reduce their risk of losing an important employee due to the birth of a child as companies rather hired men than women. But this strategy will be less important in the future. It is expected that the risk-environment of companies will change because of a larger group of fathers taking parental leave. Such a changed risk-environment could increase the career opportunities of women and might reduce the gender wage gap. However, it is also expected that the overall risk of companies increases. Assumed that companies need equity to cover risks, an increase of the overall risk reduces investment opportunities if it is not possible to increase equity in the same way. This could influence the current economic development negatively.
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Business Cycle Forecast, Summer 2008: Price Hikes and Financial Crisis Cloud Growth Prospects
Wirtschaft im Wandel,
No. 7,
2008
Abstract
In the summer of 2008 the turmoil on financial markets and that on the markets for energy dim the prospects for the world economy. The acceleration of the oil price hike during the first half of the year has led to an increase in expected inflation and to higher interest rates on capital markets, while stock prices are going down. At the same time, the financial crisis is far from over, and banks in the US and in Western Europe continue in their efforts to consolidate their balance sheets. Thus, the expansion of credit supply will be scarcer in the next quarters. All this means that demand will slow in the developed economies during the next quarters. However, the massive fiscal stimulus will help the US economy to stabilize, and the world economy still benefits from the high growth dynamics in the emerging markets economies. All in all, the developed economies will not reach their potential growth rate before the second half of 2009. In Germany, the upswing comes to a temporary halt during summer of this year. Slowing foreign demand and the oil price hike induce firms to postpone investments, and private consumption, the soft spot of the upswing in Germany, is still sluggish due to high inflation rates that impair purchasing power. For the end of 2008, chances are good that growth in Germany accelerates again, because German exporters are still penetrating emerging markets as competitiveness does not diminish. All in all, the German economy will grow by 2.3% in 2008 (mainly due to the very high dynamics at the beginning of the year) and by 1.3% in 2009. A main risk of this forecast is that monetary policy fails in easing the high inflationary pressures. As to fiscal policy, efforts to reach sustainable public finances should not weaken.
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International Financial Integration and Stability: On the Causes of the International Banking Crisis 2007/08 and Some Preliminary Lessons.
Diemo Dietrich, Achim Hauck
Wirtschaft im Wandel,
No. 5,
2008
Abstract
Since its beginning, the recent financial market turmoil that has come to be known as the „subprime crisis“ has provoked considerable controversy among both, policymakers and scientists. The debate mainly focuses on two questions. The first is whether and how short-term measures should be taken to stabilize the global financial system. The second is which general lessons can be drawn from this crisis. Up to now, several potential causes of the crisis have been discussed in a more or less isolated manner. However, a predominant source of the crisis has not been identified yet. Accordingly, there is still a lack of knowledge regarding general consequences of the crisis for economic policy.
The purpose of this article is twofold. First, we show that to a large extent the crisis is due to the economic integration of formerly peripheral countries into the world economy that led to significant savings and investment imbalances. Thus, we argue that the crisis not only is a global phenomenon in its effects but also has global roots. Based on this argument, the second purpose of our paper is to derive implications for economic policy, where we also discuss the consequences for the future design of the global financial architecture.
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Consequences of the US-subprime Crisis Dampen Economic Growth in Germany
Wirtschaft im Wandel,
1. Sonderausgabe
2008
Abstract
The crises of the housing and the financial sector in the US and the turmoil on worldwide financial markets have clouded the prospects of the world economy for this and next year. In particular, conditions for financing consumption and investment will worsen. In addition, the price hikes for energy and food entail a redistribution of purchasing power from ordinary households to the producers of these goods. As a consequence of all this, the economy in the US will be more or less stagnating this year, and world growth will slow down. Firms in the nonfinancial sector, however, are generally in good financial condition, policy in the US takes strong measures to contain the crisis, and growth dynamics in emerging markets economies appear to be robust enough to withstand the dampening effects. In Germany, the economy is, in spite of the adverse effects from abroad and in particular the strong appreciation of the euro, still in good shape. Apparently, the economy has become more robust in the past years, partly due to increased competitiveness of German producers. Still, economic expansion will slow down, with annual growth rates of 1.8% for this year and 1.4% for 2009.
For the first time the forecast of the institutes comprises a medium term projection. For this, the potential growth rate of the German Economy is estimated to be 1.6%. As to policy recommendations, the institutes advise against the establishment of minimum wages in Germany, because they fear adverse effects for employment. In this point the IWH and its partners take a different view.
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On the Economics of Ex-Post Transfers in a Federal State: A Mechanism Design Approach
Martin Altemeyer-Bartscher, T. Kuhn
WWDP, 95,
No. 95,
2008
Abstract
As a common feature in many federal states grants-in aid are payed to jurisdictions ex post, i.e. after local policy measures have chosen. We show that the central government cannot offer grants ex ante in a federal states with informational asymmetries as well as inter-temporal commitment problems. Local governments’ incentives to provide public goods are distorted if they rely on federal grants-in-aid offered ex post. Furthermore it becomes obvious that local governments are apt to substitute tax revenue for higher grants-in-aid if relevant local data are unobservable for the central government. To which extend ex post transfers mitigate local governments’ incentives crucially depends on the information structure predominant in the federation.
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Business cycle forecast 2008: German upswing takes a break
Wirtschaft im Wandel,
No. 1,
2008
Abstract
Economic growth in the industrial countries will be much more muted in 2008 than in the past year. One cause is the prolonged oil price hike during 2007. The second and more important cause is the intensification of tensions on world financial markets. Due to problems in the financial sector, credit expansion will slow next year in the euro area as well as in the US. This will dampen demand in the real economy. A significant downswing in the industrial countries, however, is not the most likely scenario: in the US, expansive economic policy and a weak dollar that gives production in the US a competitive edge will prevent the economy from sliding into recession. In the euro area, high profitability of firms and structural improvements in the working of labour markets will help the economy cope with the stronger euro and with higher costs of external financing due to the turmoil in the financial sector. In Germany, the upswing has still not reached the demand of private households. The main reason is that real wages were stagnating in 2007 and will not rise by much in 2008, since inflation has accelerated considerably at the end of last year. In addition, weaker dynamics of external demand will dampen export growth. This and the end of tax incentives for investment at the end of 2007 will dampen investment activity. All in all, the economy will slow down in the first half of 2008. However, chances are good that the upswing will only have taken a break: when the dampening external shocks have ceased, the driving powers of the upswing will prevail; dynamic employment growth is a reflection of the strong confidence of firms. A major risk for employment and for the German economy in general is, however, the possibility that the policy concerning the labour markets changes course; bad omens are the recent the introduction of minimum wages for postal services and the announced extension of unemployment benefits for persons older than 50.
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