As things stand there is actually a fair amount of data around from the global economy and from Germany that signal that things are bottoming out. Even the beleaguered mechanical industry suggested such in Hannover and Ben Bernanke has also given hints in this direction for the USA. It could therefore be the case that those forecasts which do not foresee any substantial pickup until mid-2010 are considerably “behind the curve”. We saw something similar in early 2008 when the optimism of some forecasters was almost uncontainable.
Germany: Dangerous pessimism
There are plenty of reasons to suggest that the economy could bounce back strongly. Present developments are indisputably being driven by deep uncertainty among economic actors about the future and by cyclical elements. That means that, following the steep slide of the like seen in the fourth quarter of last year and the first quarter of this, a rapid rebound could well be on the cards. In economic terms that would indeed be warranted as production has plummeted far more steeply than aggregate demand will do in the medium term. It may well be that global consumer demand will dip slightly this year but not by the 30% or 40% that car manufacturers’ orders, for example, have tumbled.
Moreover, the combined impact on demand of aggressive interest rate cuts, massive stimulus packages and the boost to purchasing power from the slide in commodity prices is starting to be felt. Business expectations have been brightening gradually since the beginning of the year and, despite rising unemployment, private consumption has not fallen off a cliff.
The ugly negative figures flying around for Germany hinge crucially on the statistical starting point at the beginning of the year, i.e. the first quarter of 2009. A six per cent drop for the year as a whole does not mean that the economy is set to slide much further even though that is the public impression. The steepest slide is behind us, in the institutes’ forecast as well – they are not forecasting a further fall in the second half of the year. That needs to be made clear.
The forecast for unemployment is pivotal. The institutes have penciled in a jobless total of close on 5 million at the end of 2010, a figure hard to imagine without major political unrest. If this were true, it should not be hushed up. But it is an assertion based on a host of assumptions and, in the current situation marked by massive uncertainty, stands on shaky ground. It would really suggest the need for further massive stimulus packages. But policymakers should not be seduced into pursuing such an avenue with extremely long-term effects, just as the programs introduced to date are starting to work. There is insufficient foresight – particularly at a time when key indicators are showing signs of stabilization.
Dr. Michael Heise
email: [email protected]