ifo Institut / about the state of the crisis

June 2009

Mr Nerb, the ifo business climate index shows a cautiously optimistic picture amid the crisis. Does it see an end to the crisis?

The ifo business climate indicator rose in April, May and June. According to the indicator, we are currently close to the lower economic turning point. Although this is positive, we should not forget that the economic activity level will be very poor for some time yet. Capacity utilization in industry is currently 71.5%, around 14% below the norm. More than half of industrial companies regard their technical capacity and staff headcount as too high for the projected demand trend in the next twelve months. It is therefore likely to be a very long drawn-out economic recovery process, associated with rising unemployment until mid 2010 even though production and sales are already rising.

Which sectors do you believe will recover more quickly? Which will take longer to see a trend reversal?

Industrial companies, particularly the export-intensive segments, are the economic losers this time. As companies worldwide will only start to invest more intensively once their earnings situation has improved sustainably, Germany’s star sectors, such as civil engineering, some of which have export quotas of over 70%, will only emerge from the crisis very slowly. Looking at the economy overall, we cannot forget that industry only accounts for around a quarter of German GDP and of total employment. Outside industry, the economic situation is now significantly better. Currently, the ifo business climate in retail and construction is far more positive than at the high point of the last recession of 2002/2003. On average in the service sectors, the business climate indicator is around the past recession level of 2002/2003, while for industry, it is significantly worse than the previous recession value. As the global economy will gather pace only slowly, the economic recovery in Germany could come more from the consumer side, similarly to 1985/1986 when lower energy prices for consumers boosted other consumption.

How does the current situation differ from earlier economic crises? Where are the parallels?

As already discussed, the current economic crisis is mainly characterized by the fact that the real economy fell into recession at the same time, from autumn of last year, virtually all over the world. This was down to the global financial crisis. World trade is likely to decline by over 10% this year, with the main sufferers being all export-focused companies, particularly those from the investment goods sectors like mechanical engineering, vehicle manufacture and electro-technology. Investment across the world will only regain pace once the huge capacity reserves are reabsorbed following the recovery in demand. With previous economic downturns, there were usually large regional differences. An economic swing, i.e. the start of an economic recovery, in the USA, for example, during the setting in of the downturn in Europe enabled companies to vary their exports regionally. This is far less likely this time, as all regions of the world have been drawn into recession. For many German investment goods providers, the economy will not start to look good again until the end of 2010/2011.

What do you think the landscape will look like for us and the German economy in 2020?

In the next ten years, the annual average economic growth in Germany will be 1.5%, having been at least 0.5% higher in the past ten years. The reason for this is the relatively slow recovery from the economic crisis in the next two years and the increasingly noticeable decline in population. This tends to curb both the demand and the supply, and subsequently culminates in a growing lack of skilled labor. The already established trend towards tertiarisation will continue further, which means that the service sector (e.g. the healthcare sector and also knowledge based services such as research and development (R&D), training, management consultancy, certification, information and communication services, legal services (including intellectual property law), financing and marketing services) will benefit greatly.

Thank you very much for the interview!

June 2009

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