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14.12.2021 • 29/2021

German economy not yet immune to COVID 19 ‒ outlook clouded again

The current pandemic wave and supply bottlenecks cause the German economy to stagnate in winter. When infection rates go down in spring, private consumption will increase significantly. In addition, supply restrictions will be gradually reduced. As a result, the economy will regain momentum. The Halle Institute for Economic Research (IWH) forecasts that German gross domestic product will increase by 3.5% (East Germany: 2.7%) in 2022, after 2.7% (East Germany: 2.1%) in the current year. Inflation is expected to decline only slowly.

Oliver Holtemöller
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14.09.2021 • 23/2021

Production bottlenecks delay recovery

The German recovery made good progress over the summer 2021. However, bottlenecks in sea transport and the production of intermediate goods are weighing on world trade. The rise in raw material prices has prompted inflation rates to spike, and an increase in new infections is clouding the outlook again. A weak final quarter is therefore to be expected. The Halle Institute for Economic Research (IWH) forecasts that German gross domestic product (GDP) will increase by 2.2% in 2021 and 3.6% in 2022 (East Germany: 1.8% and 2.8%).

Oliver Holtemöller
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15.06.2021 • 16/2021

Increase in personal contacts spurs economic activity

This summer the economic outlook in Germany is bright. As the pandemic is in retreat, the restrictions that have hampered many service activities are likely to be gradually lifted, and a strong boost in private purchases can be expected. The Halle Institute for Economic Research (IWH) forecasts that gross domestic product will increase by 3.9% in 2021 and by 4.0% in 2022. Production in East Germany is expected to increase by 3% in both years, respectively.

Oliver Holtemöller
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14.10.2020 • 21/2020

Recovery Loses Momentum ‒ Economy and Politics Still Shaped by the Pandemic

The corona pandemic leaves substantial marks in the German economy and its impact is more persistent than assumed in spring. In their autumn report, the leading German economic research institutes have revised their economic outlook downwards by roughly one percentage point for both this and next year. They now expect gross domestic product to fall by 5.4% in 2020 (previously -4.2%) and to grow by 4.7% (5.8%) in 2021 and 2.7% in 2022.

Oliver Holtemöller
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07.09.2020 • 17/2020

IWH Bankruptcy Update: Bankruptcies Hit New Low; New Outlook Feature

The number of companies reporting bankruptcy in Germany sank to a new low in August. Associated job losses also declined noticeably, following marked increases in prior months. Published by the Halle Institute for Economic Research, the IWH Bankruptcy Update provides monthly statistics on corporate bankruptcies in Germany. Starting this month, the update will also feature a two-month outlook.

Steffen Müller
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Transmitting Fiscal Covid-19 Counterstrikes Effectively: Mind the Banks!

Reint E. Gropp, Michael Koetter, William McShane
IWH Online, No. 2, 2020
Abstract
The German government launched an unprecedented range of support programmes to mitigate the economic fallout from the Covid-19 pandemic for employees, self-employed, and firms. Fiscal transfers and guarantees amount to approximately €1.2 billion by now and are supplemented by similarly impressive measures taken at the European level. We argue in this note that the pandemic poses, however, also important challenges to financial stability in general and bank resilience in particular. A stable banking system is, in turn, crucial to ensure that support measures are transmitted to the real economy and that credit markets function seamlessly. Our analysis shows that banks are exposed rather differently to deteriorated business outlooks due to marked differences in their lending specialisation to different economic sectors. Moreover, a number of the banks that were hit hardest by bleak growth prospects of their borrowers were already relatively thinly capitalised at the outset of the pandemic. This coincidence can impair the ability and willingness of selected banks to continue lending to their mostly small and medium sized entrepreneurial customers. Therefore, ensuring financial stability is an important pre-requisite to also ensure the effectiveness of fiscal support measures. We estimate that contracting business prospects during the first quarter of 2020 could lead to an additional volume of non-performing loans (NPL) among the 40 most stressed banks ‒ mostly small, regional relationship lenders ‒ on the order of around €200 million. Given an initial stock of NPL of €650 million, this estimate thus suggests a potential level of NPL at year-end of €1.45 billion for this fairly small group of banks already. We further show that 17 regional banking markets are particularly exposed to an undesirable coincidence of starkly deteriorating borrower prospects and weakly capitalised local banks. Since these regions are home to around 6.8% of total employment in Germany, we argue that ensuring financial stability in the form of healthy bank balance sheets should be an important element of the policy strategy to contain the adverse real economic effects of the pandemic.
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For How Long Do IMF Forecasts of World Economic Growth Stay Up-to-date?

Katja Heinisch, Axel Lindner
Applied Economics Letters, No. 3, 2019
Abstract
This study analyses the performance of the International Monetary Fund (IMF) World Economic Outlook output forecasts for the world and for both the advanced economies and the emerging and developing economies. With a focus on the forecast for the current year and the next year, we examine the durability of IMF forecasts, looking at how much time has to pass so that IMF forecasts can be improved by using leading indicators with monthly updates. Using a real-time data set for GDP and for indicators, we find that some simple single-indicator forecasts on the basis of data that are available at higher frequency can significantly outperform the IMF forecasts as soon as the publication of the IMF’s Outlook is only a few months old. In particular, there is an obvious gain using leading indicators from January to March for the forecast of the current year.
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EFN Report Winter 2018/19: Economic Outlook for the Euro Area in 2019 and 2020

EFN Reports, No. 1, 2019
Abstract
• The cyclical upswing of the world economy comes to an end, since expansionary policies in the US are expected to peter out in 2019, and the protectionist course of the US government clouds the perspectives for world trade. • However, if a major trade conflict can be avoided, chances are good that world production growth will be close to the long-run average of a bit more than 3%, with trade expanding at a similar pace. • Slowing exports, in particular to China, can partly explain the setback, while domestic conditions still appear favourable: firms continued hiring, albeit by less than before, tight labour markets in many member countries have caused wages to rise more quickly, and house prices continue to increase markedly. • Since a trend to higher inflationary dynamics is still not detectable, the ECB is likely to either keep key interest rates unchanged in 2019 or raise them very carefully at the end of the year. • All in all, we expect the euro area growth rate to come down from 1.9% in 2018 to 1.5% in 2019 and 1.8% in 2020, and inflation to slightly slow down from 1.8% in 2018 to 1.6% in 2019 and 1.5% in 2020.
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EFN Report Autumn 2018: Economic Outlook for the Euro Area in 2018 and 2019

EFN Reports, No. 3, 2018
Abstract
• Signs of a slowing world economy are piling up: Since the beginning of the year purchasing manager indices have been declining globally, in summer higher US interest rates led investors to withdraw capital from emerging markets, and as a consequence, capital costs rose and currencies depreciated in many emerging markets economies. In October stock prices decreased markedly worldwide including the US, despite the strong upswing in this country. • As a consequence of the turmoil on financial markets, monetary conditions in many emerging economies are no longer favorable. What ultimately counts for the prospects of the global economy, is, however, the performance of the US, the Euro area, China and Japan. The upswing in the US appears stable enough to continue well into 2019. While at present the rest of the group appears to lose momentum, there is a good chance that production in each of these economies will still expand at rates that are close to their potential growth. Further protectionist rounds are the most important risk to this scenario. • In the first half of the current year the euro area economy expanded at a markedly slower rate than in 2017, about 0.4% per quarter, but still substantial. Rising risk premia on Italian assets will probably force banks in this large country to tighten credit conditions, and a slowing world trade will dent export growth. All in all, we expect GDP growth in the euro area to go down from 2.4% in 2017 to 2.0% in 2018 and to 1.7% in 2019. • Employment continues to expand and vacancy rates are at present higher than in 2017. As a consequence, wages rise more quickly: nominal compensations per employee started accelerating early in 2017, and negotiated wages followed at the beginning of 2018. Wage inflation of slightly below 2.5% and healthy growth in employment raise real labor incomes markedly. • Our forecasts are based on the assumption that rating agencies will continue as-signing investment grade to the Italian government debt, and that the Italian government and the European Commission will find a compromise about the draft budget of the country in the coming weeks. Another assumption is that the UK will not exit the EU in an unorderly way in March 2019.
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EFN Report Summer 2018: Economic Outlook for the Euro Area in 2018 and 2019

EFN Reports, No. 3, 2018
Abstract
• In summer 2018 the cyclical upswing of the world economy is not over, but it appears to be fragmenting. While economic activity in the European Union has lost steam, the upswing in the US has gained pace, and growth in China appears to be robust. • Markets for commodities as well as for capital are at present strongly affected by political movements: oil prices are more than 50% higher than one year ago, as the US exit from the Iran nuclear deal puts the long run oil supply from Iran at risk, and the strongly expansionary US tax reform explains the rise in US long run interest rates. . • Uncertainties about the future international trade system cause firms to slow down or even reverse the globalization of value chains. As an early consequence, world trade in the second half of 2018 and in 2019 will expand at much slower rates than during 2017. • In the euro area growth slowed in the first quarter 2018, due to weaker investment activity in France and Italy and, more importantly, a fall in exports in all larger euro area economies except Spain. However, the drivers of the upswing such as low interest rates for credit and expanding real incomes will still be supportive in the near future, and fiscal policies will be slighly more expansionary. But a slowdown in world trade will dent export growth as well as corporate profits. All in all, we expect GDP growth in the euro area to go down from 2.4% in 2017 to 2.1% in 2018 and to 1.7% in 2019 – a forecast that will only be realized if damages to the international trade system are limited and if the European sovereign debt crisis does not come back. • While wage inflation has been slowly increasing during the past quarters to about 2%, a clear upwards trend of core consumer price inflation is still not detectable. The recent jump of the headline rate to 1.9% is due to higher oil prices. Our forecasts for 2018 and 2019 are close, although still below, 2%.
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