Press Office

RWI Essen raises GDP forecast for 2008 and reduces it for 2009

Press release from 12 June 2008

RWI Essen has raised its forecast of economic growth for 2008 by 0.5 percentage points to 2.2% and at the same time lowered its forecast for 2009 by 0.3 percentage points to 1.5%. With this adjustment, the institute is on the one hand reacting to the unexpectedly strong increase in Gross Domestic Product at the start of this year. On the other hand, it is taking account of the fact that indications of weakened growth are increasing.

RWI Essen has indeed raised its forecast of economic growth in the 2008 year from 1.7% to 2.2%, but at the same time is looking more skeptically at the future. It therefore expects a growth rate of 1.5% in 2009, following its estimate of 1.8% in March. The higher forecast for 2008 predominantly reflects the unexpectedly strong increase in Gross Domestic Product (GDP) at the start of this year. Adjusted for seasonal and working day effects, this rose by 1.5% in relation to the previous quarter - a level which was last observed in 2006.

This good news is however to be taken with a pinch of salt. Firstly, a good proportion of the growth is attributable to increases in stocks. This points to a discrepancy between parts of the national accounts, which, as experience shows, is an indication of impending revisions. Secondly, the GDP growth rate is significantly determined by technical "refinements". It remains to be seen whether the seasonal adjustment process gives sufficient weight to the pronouncedly mild winter last encountered and whether the calendar adjustment takes adequate account of the lower number of working days in the first quarter caused by the unusually early Easter holidays. It is probable that the adjustment processes named above will themselves cause the season and calendar-adjusted GDP to fall in the second quarter.

Weaker growth expected in the course of the year

Above and beyond this, numerous indicators point in the meantime to a slowdown in the economic cycle. Industrial production, for example, declined in April for the third time in a row. Orders received by industry have even been falling since December 2007. Furthermore, the relative rise in the value of the Euro is likely to put an increasing strain on German exports. As if that were not enough, the global market prices of energy and raw materials have continued to rise, with the result that inflation will surely remain high in the short term, given an ample supply of liquidity. On the annual average, RWI Essen expects an inflation rate of 3%, which will prospectively put a tangible damper on the rise in real incomes, even if these are still to increase slightly in response to the good job market situation and higher wage increases. All in all, the institute assumes a significant slowdown in growth for the rest of this year. The annual rate of 2.2% was assuredly essentially generated in the first quarter alone. Season and calendar-adjusted GDP in the fourth quarter of 2008 is hardly likely to be any higher than in the first.

For 2009, an initially revitalized economic cycle is to be expected. This will surely be attributable to a recovery of the economy in the USA and a further more rapid expansion of world trade. As it is assumed that the uncertainties on the financial markets will gradually disappear, it is also expected that monetary policy will once again focus more on combating inflation. By now, namely, it is unmistakable that inflation is no longer being driven exclusively by energy and foodstuffs prices. Wages and unit labor costs in Germany, for example, are in the meantime rising at a faster rate. Even if - as assumed here - prices on the raw materials markets do not increase any further, price rises in the Euro zone are likely to remain in excess of the ECB's targets in 2009 too. It is therefore expected that monetary policy will become more restrictive, which should have a dampening effect on the economic cycle in the course of the coming year. On the average for the year, GDP will prospectively increase by 1.5%.

For further information, please contact:
Dr. Roland Döhrn, Phone:+49 201 8149-262,
Sabine Weiler (Press Office), Phone: +49 201 8149-213,