Economic Forecast 2011/2012

Following strong growth of 3.6 percent in 2010, Allianz is forecasting growth of 2.9 percent in 2011. “The German economy is ticking over nicely. Industrial capacity utilization is now well above its long-term average. Industry is as upbeat about the current situation as it was at the peak of the last upswing in late 2006/early 2007, the services sector even more so. Companies have been recruiting heavily; the number of people in work in the economy as a whole has risen by more than 450,000 over the past year,” said Michael Heise, chief economist at Allianz.

The world economy is currently being influenced by positive and negative factors. On the positive side there is the further improvement in business surveys, reflecting not least the   very healthy state of order books. It is also encouraging that higher overall output has eased the situation on labor markets further. On their own, these trends would point to broader-based growth. But on the other side there is now a whole bundle of negative supply and demand-side factors which in total pose a substantial risk to the world economy going forward. These include a possible further spike in oil prices, the deterioration on the price front in the emerging markets (particularly in China), the need for budgetary consolidation in the eurozone, but also in the USA, and the repercussions of the earthquake in Japan.

Despite these risks, the outlook for the German economy remains upbeat, also beyond 2011. The drag on economic momentum from government consolidation measures and the impending change of course in monetary policy will be only slight. However, due mainly to the slowdown in world trade and high commodity prices, German economic growth in 2012 is likely to be lower than this year. “In 2012 we expect to see an increase in real gross domestic product of 1.7 percent. The underlying improvement on the labor market could nonetheless continue. The jobless total is likely to fall to around 2.5 million by the end of 2012,” said Heise.

Private household disposable income is likely to increase by 3.4 percent in 2011 and 3.2 percent in 2012.  Given expected inflation of 2.2 percent this year and 1.8 percent next year and the resulting erosion of purchasing power, real incomes are set to increase by 1.2 percent in 2011 and 1.4 percent in 2012. Despite rising energy prices consumers are still in spending mode. Allianz expects to see only a slight dip in the savings ratio in 2011. Rising interest rates tend to push up the propensity to save. In real terms private consumption is likely to increase by 1.5 percent in 2011. In 2012 Allianz forecasts a further increase of 1.2 percent. Private consumption could thus become a mainstay of the domestic economy.

New borrowing is likely to fall sharply this year. The upswing is continuing, fueling a strong rise in tax revenue. And the improvement on the labor market is helping to curtail the scale of government transfer payments. Together with the consolidation measures agreed in last summer’s “Package for the Future”, new borrowing is set to fall from EUR 82bn last year to around EUR 50bn this year. In terms of GDP, the government deficit will come in at only 1.9 percent. “This means that Germany will get back within the Maastricht deficit ceiling earlier than demanded by the EU deficit procedure. And also with regard to the national debt brake, which stipulates broadly balanced budgets from the middle of the decade, headway looks to be ahead of plan. In 2012 the deficit looks set to fall further to only 1.0 percent of GDP. The fiscal scope for tax cuts should therefore be substantially higher,” said Heise.

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