Economic Forecast 2010

Allianz expects the solid economic recovery to continue in Germany in the fourth quarter of 2009, and a promising economic start to 2010. "Compared with a year earlier, GDP in the first quarter of 2010 is likely to be around 4 percent higher than the low seen in Q1 2009. However, the overall backdrop will not allow for any fireworks in 2010," according to Michael Heise, chief economist at Allianz.

The impetus provided by the stimulus packages will subside the world over, and recovery will be slow in the affected real estate markets. Consumer demand will at best expand moderately in countries with high household debt ratios, and global demand for capital goods will remain subdued given that capacity utilization remains below average. German exports will therefore not be the strong economic driver of previous upturns. Domestic investment activity is likely to pick up, but 2010 will see rather less impetus from consumer demand than 2009 – in part because labor market developments will remain a drag for some time and purchasing power gains made on the back of lower energy prices will come to an end. All in all, the economic recovery will lose momentum, at least temporarily. On average the economy is likely to grow by 2.7 percent in 2010. In 2009 Allianz economists predict that the economy will shrink on average by 4.2 percent despite the recovery in the second half of the year.

The very expansive fiscal policy, together with revenue losses and increased spending as a result of the crisis, have sent new borrowing soaring in Germany. Following the small surplus in the public sector budget (including social security) in 2008, Allianz expects a deficit of EUR 70bn this year (2.9 percent of GDP), and of EUR 105bn for 2010 (4.2 percent of GDP). This would mean that Germany will breach the Maastricht deficit criterion of a maximum of 3 percent of GDP in 2010; however, the Allianz economists consider it a distinct possibility that new borrowing will be reduced to well below the 3%-mark within the new legislative period until 2013. If, as envisaged in the medium-term financial plan, government spending growth remains 2 percentage points below the growth rates of nominal GDP from 2011 (e.g. GDP plus 3 percent per annum, government spending plus 1 percent per annum), the deficit ratio could be reduced by almost one percentage point a year. It would then only be around 1½ percent in 2013, assuming no change in tax legislation. Heise: "Given discipline on the spending front, there is by all means scope for fiscal policy to lower the overall tax burden. Policymakers should use this scope aggressively to address the necessary structural reforms in private income tax and corporate taxation."

The labor market in Germany has proved to be extremely resilient in light of the severe recession. According to the economists at Allianz, the modest rise in unemployment, which is well below average in international terms, is also attributable to the enhanced competitiveness of companies in recent years, along with the use of short-time working and working-time accounts. Companies thus entered the recession better placed in terms of earnings and capital, giving them more scope to avoid layoffs. "Unemployment is set to increase further in 2009 and 2010 as a result of the recession. However, we do not expect to see the dramatic deterioration on the labor market as repeatedly predicted. At the end of 2009 around 3.5 million people are likely to be out of work, with the jobless figure not moving towards the 4 million-mark until March. Job cuts are likely to come to an end in 2010, giving annual average unemployment of 3.8 to 3.9 million," said Heise.

The economic picture in the euro area has brightened up considerably. The stabilizing trend was largely due to a firming up of consumption and an increase in real net exports. Foreign trade made its first positive contribution to growth since Q2 2008. The economists at Allianz expect the expansion to continue in 2010. However, in comparison with the second half of 2009, the economy will lose momentum in the course of the year as the various stimulus packages come to an end. On average overall output in the euro area is set to rise by 2 percent in 2010.

The global economy as a whole is also expected to grow appreciably by 2.7 percent in 2010, having slumped 2.3 percent this year (country weighting based on current exchange rates). The predicted increase for the industrialized nations is around 2 percent, and for emerging markets, 4.2 percent. Taking the emerging markets’ share in the global economy into account, this means that emerging markets will contribute exactly half of the forecast growth in 2010.

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