Ifo Economic Forecast 2011/2012: Debt Crisis Curbs German Economy

On 14 December 2011 the Ifo Institute presented its economic forecast for 2011 and 2012 in the framework of a pre-Christmas press conference. Gross domestic product in Germany increased significantly until recently. The Ifo Business Climate Index and other leading indicators show, however, that the German economy is facing a downturn. The weakening world economy and the European debt crisis are the main factors behind this. The dependency of economic developments on the decisions made by Europe's politicians complicates the forecast considerably by making radically different plausible scenarios possible. Based on the assumption that the euro crisis does not worsen and that Italy in particular can continue to finance itself via the capital market, it should be possible to avoid a recession in Germany. Germany's GDP is nevertheless only expected to increase by 0.4% in 2012. Growth in employment is therefore expected to slow significantly. Supported by demographic factors, however, the number of unemployed should still decrease by around 140,000 to around 2.8 million. This corresponds to an unemployment rate of 6.7%. In response to weaker economic activity the pace of price increases should slow; we forecast an average annual inflation rate of 1.8% in 2012. The ratio of public budget deficit to nominal gross domestic product looks set to be around 0.9%. We would like to emphasize that macro-economic uncertainty, not least due to the political situation, is extremely high at present. Even small deviations from its planned policy of consolidation on the part of Italy could lead to fresh upheavals in the already tense financial markets and to political reactions that are almost impossible to assess. Such events could quickly make the assumptions underpinning this forecast obsolete. From a technical point of view, the probability of the baseline scenario occurring is considerably lower than in normal forecast situations.