Outlook 2010: Economic situation and capital market

Business activity in 2010 will still bear the scars of the global economic crisis, although the economic outlook for Germany has brightened considerably. Not all that long ago it was still widely held that business would not rebound before mid-2010, with a severe downturn on the labor market causing a sharp drop in consumer spending. This view was shared, among others, by the economic research institutes in their joint April 2009 opinion paper, in which they calculated that for 2010 as a whole German gross domestic product would shrink by 0.5%. Even more skeptical at that time was the forecast by the International Monetary Fund, which saw the German economy shrinking by 1% in 2010.

Meanwhile, however, the German economy has already turned in growth again for two successive quarters, the second and third. Overall economic output will be much higher at the turn of the year 2009/2010 than on average for 2009. This alone has improved the starting position for 2010. So far, the anxiously anticipated jobs crisis predicted in many quarters has not materialized; indeed the German labor market has proved surprisingly resilient, with the number of people in work falling only moderately. This has kept a lid on the losses in purchasing power stemming from the economic crisis. Bolstered by almost complete price stability, real consumer demand has broadly held its level. In the wake of these developments most economic forecasts for 2010 have been upped significantly in recent months.

We estimate that the German economy will expand in 2010 by 2.8%, meaning that by the end of 2010 it would already have made good two-thirds of the production losses caused by the economic crisis. Although very positive, this still clearly shows that it is taking longer to recover from the financial market upheaval than from earlier recessions.

In the first half of 2010 powerful fiscal stimuli from hefty cuts in taxes and contributions at the beginning of the year and realization of investment in the infrastructure will lead to economic growth of 3% (at an annual rate). But in the second half-year the economy will already start to lose steam, growing by 2% (annualized), partly as the public spending contained in the economic stimulus packages gradually peters out.

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