Ifo Economic Forecast 2003/2004: Recovery not until next year

World economic activity was pointed slightly upward in the early summer of 2003, but a sustainable recovery had not yet set in. Dampening factors are the Iraq crisis, the temporary surge in mineral oil prices, the outbreak of the pulmonary illness SARS as well as the persisting lull in the IT sector. In the further course of this year, a turnaround is expected and in 2004 a recovery. Since the retarding factors are waning gradually, the stimulating effect of expansive monetary policies in most countries will strengthen. Also in Germany we expect a slight increase in economic output in the second half of 2003 as a result of the gradual improvement of the international economic environment and based on the business expectations responses of the firms participating in Ifo Business Survey. Nevertheless the economy will still show stagnation, both over the course of the year and for total annual performance. On average for the coming year, the gross domestic product will expand by around 1.5%, but ½ percentage point of this growth will be due to the unusually large number of working days. The number of unemployed will rise by around 390,000 to 4.45 million for the year in 2003 and will increase in the coming year to 4.6 million. The unemployment rate - based on the whole domestic labour force - will then amount to 10.8%, the highest level since reunification. A turning point in unemployment by the end of the forecasting period is not expected. The rise in the cost of living will remain moderate; the inflation rate will be 0.9% this year and 0.8% in 2004. The budget deficit will increase this year by approximately €80 billion (3.7% of GDP); in 2004 the deficit will be an estimated €70 billion (3.2% of GDP). Germany will fail to satisfy the criteria of the EU Stability and Growth Pact for both years.