KfW economic forecast: recovery to continue, recession fears are hardly justified

• Slowing of growth in second quarter should not be overly dramatised after the extraordinary strong first quarter
• KfW expects gross domestic product to grown by 3.1% in 2011, forecast for 2012 is 1.6%
• Main risks: Nervous financial markets, weak banks, doubt in ability of policymakers to act in the Euro crisis, fragile US economy

In light of gross domestic product (GDP) growth of only 0.1% in the second quarter 2011 and the most recent stock market disturbances, there are increasing worries of a new recession. From today's perspective these fears are hardly justified. Despite near stagnation, GDP in the first half of the year grew overall by +1.6%, a considerable amount compared to the second half of the year 2010. It is expected that this basic upward trend will continue in the second half of the year, however with a reduced dynamic. After the reprieve in the spring, growth is expected to pick up to 0.6% in the third quarter and to stabilise at nearly 0.4% in the following quarters through the end of 2012. Taken as an annual average, this will result in a price and calendar adjusted GDP growth of 3.1% for the current year and 1.6% in 2012.

This forecast is based on three factors: First the global economy will slow down, but will continue to grow at an adequate pace. After nearly 5% growth in the past year, a rate of about 3.5% for both 2011 and 2012 is expected. Key drivers are still the large industrialising countries, which have a solid demand for German exports. A significant revaluation of the Euro which could counteract these impulses is improbable against the background of the structural problems in the Euro zone. The second factor is the above-average utilisation of production capacity by enterprises, which should stimulate investments in equipment. The third factor is the very good situation on the labour market: In August 2011 the seasonally adjusted rate of unemployment was 7.0%, the lowest level since data was first collected for all of Germany in December 1991. This rate will continue to decline in the coming months. Together with rising wages and the still very low interest rates, this creates generally quite favourable conditions for private consumption and housing construction.

Dr Norbert Irsch, Chief Economist of KfW Bankengruppe: "The German economy is headed towards a soft landing. After impressive strong growth in the first quarter, the economy is now setting a pace that can be maintained without disruptions also over the long-term. Both in this as well as the coming year, real growth is expected to be above the long-term average of 1.2% since reunification - in other words it would mean good results for Germany. However there are considerable risks in this forecast. These consist mainly in the high nervousness in the financial markets, the unresolved sovereign debt crisis, the greatly increased doubt in the ability of policymakers to act in the Euro zone, the again growing insecurity regarding the solidity of banks, as well as the fragile economic situation in the USA and some other industrial countries. If these risks materialise, then a considerably worse real economic development particularly for 2012 is to be expected."

The detailed analysis with data table and charts on the KfW Economic Compass is available under www.kfw.de in the section "Research".