Germany’s real gross domestic product (GDP) has taken a tumble unprecedented in the history of the Federal Republic. However, this is not fully in line with sentiment in the German economy. How come sentiment is not as bad as the slide in GDP would suggest?

According to the April Ifo test, business expectations have now improved for the fourth straight month. Even more surprising is the fact that the steep slide in the assessment of current business conditions has evidently come to a halt, with an increase of nearly one point. Experience shows that the assessment of business conditions tends to be more of a lagging indicator.

In Germany an ever steeper slide in the economy in 2009 is being promulgated from on high. As far as the economy was concerned, the year was dried and dusted and we should count ourselves lucky if things pick up again in 2010. Businesses and private households needed to be informed as they had not yet fully accepted that a crisis was in full swing. Although all forecasters concede that great uncertainty attaches to all predictions at present, this note of caution gets drowned out in the political discussion. For this reason a number of warnings should accompany current forecasts.

The business climate in trade and industry clouded over slightly in March compared to February, but in effect it has been more or less flat since December. This signals that the economy is now bottoming out. It is certainly encouraging that business expectations have now risen three months in a row. As a leading indicator, these are of greater significance than the assessment of current business conditions which remains in the doldrums.

While the business climate in industry deteriorated slightly in February, it has shown a surprising recovery in the services sector. Particularly encouraging is the fact that business expectations, deemed to be a reliable leading indicator, have now improved for the second time in succession in nearly all major sectors. In retail, the business climate has now moved up for the third time in a row.

The 2.1% drop in overall output in Germany in Q4 2008 documents that Germany is in its severest recession in a long time. Since the second quarter of 2008 the economy has shrunk by 3.1%, the steepest fall in any recession since the foundation of the Federal Republic.

The slight improvement in the Ifo business climate in January comes as a positive surprise. It is the first indication that the economy is bottoming out. The extremely steep slide in the economy has evidently slowed in early 2009. But this does not alter the very grim data for the start of this year. German GDP in the first quarter of 2009 is likely to be around 3% down on the first quarter of 2008.

Private households are estimated to have held financial assets worth EUR 4.49 trillion at the end of 2008, around EUR 110 billion less than at the close of 2007. With the meltdown on the stock exchanges the Germans’ financial assets have thus shrunk for the second time in the history of the Federal Republic.

As expected, the German economy shrank in the second quarter 2008. However, Germany is not heading for recession. Economic momentum is likely to pick up again in the fourth quarter. Coupled with the revision to first quarter growth figures, we have lowered our forecast for 2008 as a whole from 2.3 % to 2 %.

The Ifo business climate index slipped far more sharply than expected in July. The main culprit is likely to have been the relentless rise in energy prices up to mid-July. Without doubt, the oil price now looms as by far the largest threat to the economy, not only in Germany.

In 2007 earnings of the 30 DAX-listed companies rose sharply. Will this positive trend continue this year? In our Working Paper “No grounds for earnings pessimism” we come to the conclusion that, after four years of brisk increases, the trend in 2008 is likely to be more moderate. But it is encouraging that, even in such a tempestuous year as 2008, the upward trend in earnings will probably not be interrupted.

The German economy recorded surprisingly strong growth in the first quarter of 2008, as the Federal Statistical Office announced today. And, despite the looming slowdown as the year progresses, in 2008 as a whole the German economy looks set to grow more strongly than hitherto expected. Against this backdrop we have raised our forecast to over 2 %.

The momentum on the German labor market is unbroken. Month for month the seasonally adjusted jobless total is not only falling, but falling as a rule by more than expected. In October 2008 the number of people unemployed looks set to drop, at least temporarily, to below the 3-million mark for the first time since 1992.

Some things in life are simply too nice to get used to. In some way this also applies to the German labor market: in December 2007 the picture again improved substantially more than expected, underpinning our hope that private consumption will be the engine of growth in 2008.

Both Germany and the euro area saw growth momentum more than double in the third quarter. But things will not remain so sprightly in the winter half-year.

With the report’s overall motto of “don’t squander what has been achieved“, the Council of Economic Experts hits the nail on the head: it correctly affirms that policymakers have contributed to Germany’s economic comeback with in part radical reforms. However, the Council bemoans the risk that correct and groundbreaking reforms will be undermined or indeed revoked altogether. Against the backdrop of the current discussion on entitlement periods for unemployment benefit, employee subsidies, temporary work regulations and minimum wages, the Council enjoys our full support.

Although the Ifo business climate slipped slightly in October, given the wobbles on the financial markets, the tumbling dollar and the soaring oil price the scale of the deterioration in sentiment is surprisingly small. The business climate is still at a high level and is in line with overall economic growth of around 2 ½ %. This is shown by correlation analyses.

The Economic Research Institutes presented their autumn report today. The report warns against departing from the path of economic policy reform. We can only fully endorse this appeal. The government risks coming to a halt halfway.

The number of people out of work fell sharply in September. In seasonally adjusted terms the unemployment rate reached a 14-year low of 8.8 %. And the trend looks set to continue.

All in all the financial turmoil triggered by the US housing crisis will not leave the European economy completely unscathed but the impact will be largely confined to those countries where the economic and debt picture most resembles that of the US. This means Spain and, to a lesser extent, the UK. For the euro area we now expect growth of 2.1 % in 2008 (previously 2.2 %). Our 2008 forecast for Germany remains unchanged (2.5 %).