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Roland Berger optimistic on German economic outlook.

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Munich: Roland Berger Strategy Consultants says the German economy could grow at 3% again this year, but argues that the country needs an "Agenda 2020" to fuel long term growth.

  • After 3% growth in 2010 and 2011, Germany has the potential to do almost as well in 2012
  • EU can grow by a total of 1% in 2012, while the global economy will grow at 3.5 to 4%
  • Europe will resolve its debt crisis
  • Germany needs an Agenda 2020

The outlook for the German economy in 2012 remains positive according to a highly optimistic forecast by Roland Berger Strategy Consultants with 3% growth again possible this year.

"In developing our forecasts we have always focused on the inner strengths of the real economy," says Prof. Dr. Burkhard Schwenker, Chairman of the Supervisory Board at Roland Berger Strategy Consultants. "And we remain optimistic."

The firm says that the record shows it got its predictions, based on scenario analysis, right in 2011 and 2010.

"I'm convinced that an economy's strengths are expressed in its businesses," says Schwenker. "In Germany, we have a healthy mix of large-scale corporations and small and medium-sized enterprises. Many of them are global leaders."

Schwenker adds that German companies are generally well managed, flexible and decentralized. "They follow a European management style that is superior to the American model in many ways. One of these is that it emphasizes long-term success as opposed to short-term shareholder value."

Industrial competence is key

The Roland Berger forecast counts on sustainable growth. It notes that Germany has intelligent production systems and is ahead of the curve in automation, green tech and energy efficiency. The economy forms an intelligent cross-section of mechanical, production and electrical engineering, along with high-value technical services. "This is why I'm confident that we will have very considerable growth potential going forward," explains Schwenker.

Industrial competence can be translated into growth only if the domestic economy is intact and markets remain open and flexible. And the situation looks good here. Exports passed the one-billion euro mark in 2011. The unemployment rate in January stood at just 7.3%. The most important barometers of business confidence are up. And inflation is well under control, at just 2.1% in January. "All the crises and disasters that we had to face in 2011 — the debt crisis, stock market turbulence, Fukushima and the decision to phase out nuclear power — failed to dent our economy and threaten its stability. This is remarkable and yet another reason why we should start this year in an optimistic mood," says Schwenker.

Good opportunities for German firms on export markets

The outlook for the main German export markets is positive, the firm says. In the US, unemployment fell in December to its lowest level for three years, and the re-industrialization trend continues. In China, the signs are that the economy will continue to grow. And there are also positive signals from the other BRIC states: Russia's accession to the WTO improves opportunities in this important market for German exporters. Brazil is investing in infrastructure and technology — with an additional boost from the 2014 FIFA World Cup and 2016 Olympic Games. The firms comments that, "Here, again, we will see positive stimuli for German companies. In India, the economy grew faster last year than many had predicted — at an impressive 7.6%. This is set to continue through 2012, at around 7%. Now that economic ties are much closer, India's success will also contribute to German growth."

Europe will resolve the debt crisis

In making their forecast, Roland Berger's analysts expect the macroeconomic environment to remain stable. This means there will be no credit squeeze, no new protectionism and no explosion in commodity prices.

The Roland Berger scenario is also based on the belief that the European debt crisis will be brought under control. A number of facts support this view, the firms says. The EFSF and ESM rescue packages will probably take full effect over the summer. The transition to the ESM offers the chance to establish proper insolvency regulations for European states. "For me, an independent institution capable of overseeing such processes and applying sanctions remains the most important step toward stability," explains Schwenker. "We are at least seeing a move toward European economic government that can assume taxation and fiscal powers. Unlike a few months ago, it is now no longer politically incorrect to talk about deeper European integration. This is perhaps the key advance."

Economic development in Europe

While the positive forecast for Germany is based on the strong industrial competence of German businesses, the picture across the rest of Europe is very mixed. France will be decisive for Europe's growth prospects. Roland Berger predicts that 0.5% to 0.75% growth in GDP is possible there. By contrast, the Greek economy will shrink significantly, and Portugal will face a 3% downturn. Italy will be able to limit negative growth to 1%, thanks to the program pushed through by Mario Monti and the industrial competence of companies in the north. Spain, too, can limit the extent of the downturn. The labor market reforms that have just been introduced may keep GDP shrinkage to 0.4%.

The North and Eastern Europeans can be more optimistic about the future. They will grow by 2% and more. In the Baltic countries, growth of 2.5 to 3% is possible, and Poland, with its industrial strengths, could see 3% growth. By contrast, there is little impetus in the UK, where 0.5% growth can be expected.

Overall, the EU can achieve growth of 1% in 2012. The Roland Berger forecast is considerably better here than recent predictions by the IMF or Consensus. However, the forecast depends on the strategists' scenario for Germany actually taking place. As for the global economy, Roland Berger puts the growth rate at around 3.5 to 4%. This estimate lies more than half a percentage point above the figures given by most economic research institutes.

Germany needs an Agenda 2020

Despite the encouraging forecast for Germany, Roland Berger's analysts do see a possibility that the 3% growth trend over the last few years will come to an end. For one thing, the recovery effects in the wake of the global economic crisis will be lost. And the positive impact of the Agenda 2010 reforms is wearing off. Germany is still benefiting from the radical labor market and social policy shift brought about by those measures, but the growth stimulus is largely exhausted. This is why, as Schwenker argues, "Germany needs an Agenda 2020. Just as the EU must now launch fresh growth initiatives to revitalize the internal market, we in Germany should be proactive in developing new potential for the economy."

The central points of such an agenda would have to be more growth as well as education and tomorrow's industries. "An Agenda 2020 can succeed if government and business work together and bring in other players, such as academics," Burkhard Schwenker believes. "Even today, there are plenty of innovative solutions emerging in the field of education, research and development at the interface of government, business and the third sector." Making this fruitful for German companies must be the aim of such a program. With its industrial expertise and dual education system, Germany is well placed to do this. "The task is now to support both sectors with intelligent policies and the right framework so that we don't lose the momentum of the last few years and can build on our 3% growth path."

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