One key factor is that commodity prices have fallen substantially, boosting purchasing power. The sharp improvement in the terms of trade, the ratio of export prices to import prices, is not taken into account when calculating real gross domestic product. In times of improving terms of trade an economy’s real income performance outstrips that of real gross domestic product.
Gross domestic product overstates recession
According to the national accounts, the gain in the terms of trade in the first quarter of 2009 over a year earlier amounted to 1.0 percentage points. So, in other words, the performance of real aggregate income was one percentage point less unfavorable than that of real GDP. In the second quarter of 2009 the gain in the terms of trade is likely to be even larger at 1½ percentage points.
But if real income has fallen on a smaller scale, this boosts the prospects for an economic recovery as purchasing power has not taken the full brunt. Above all, consumer demand will not be hit by the recession to the same extent as would otherwise be the case. Given a rise in exports of 10%, which would merely offset half of the slide in exports, GDP growth of around 2½% is on the cards. With a marked recovery in world trade, the German economy could bounce back surprisingly strongly.