The German economy is currently in a sharp recession. The global economic downturn, accompanied by an unexpectedly severe contraction in international trade, led to a very strong decline in Germany’s economic output in the winter half-year of 2008-09. Downward pressure on the German economy is likely to ease during the course of 2009, although it does not look like there will be a significant upturn in the near future. The price climate continues to support economic activity. This is reported in the Deutsche Bundesbank’s latest projection, which was published today and will also appear in the June 2009 issue of its Monthly Report.

Overall output

According to the new Bundesbank projection, there will be a 6.2% fall in price-adjusted gross domestic product (GDP) in 2009. This is, above all, a reflection of the massive economic downturn in the winter half-year of 2008-09. With the gradual easing of tensions in the international financial markets, improved expectations and with the support of extensive monetary and fiscal stimuli, the German economy could regain some ground in the third quarter of 2009. As things stand, economic activity is expected to remain at a subdued level in 2010, despite picking up slightly in the course of the year. In accordance with this baseline scenario, there will be a marked fall in overall capacity utilisation. As a result, the German economy will still be in a period of major cyclical underutilisation in 2010.

Labour market

So far, the labour market has shown only a moderate reaction to the marked decline in overall economic activity. This is due mainly to the fact that, to a large extent, labour input has been adjusted to declining production by reducing working hours. More job cuts and a faster rise in unemployment may be expected in the coming quarters, however. Unemployment is likely to increase by more than 1 million to 4.4 million on an annual average in 2010. This corresponds to an unemployment rate of 10.5%.

Prices

Year-on-year consumer price inflation will temporarily enter negative territory over the next few months as a delayed reaction to the sharp increase in energy and food prices into the third quarter of 2008 and its subsequent partial correction. The medium-term price trend will probably remain positive, however. As a result, the year-on-year rates are likely to go up again towards the end of 2009. On an annual basis, the general price level will remain stable in 2009, although it will probably rise again by 0.5% in 2010. The macroeconomic projection for Germany, which was completed on 22 May, is, at the same time, the Bundesbank’s contribution to the Eurosystem’s biannual staff projection and is based on joint and/or agreed assumptions and on an identical forecasting horizon.

To read the Bundesbank’s latest projection in full, click here http://volkswirtschaft/mba/2009/200906mba_projections_en.pdf