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Upbeat view on German economy

Munich: Roland Berger Strategy Consultants today gave an extravagantly upbeat autumn forecast for the German economy.

  • There will not be a repeat of the financial crisis of 2008
  • Growth will not tail off significantly by the end of 2011, a strong "3" in front of the decimal point remains realistic
  • Expectations for 2012 are optimistic, provided Europe manages to resolve its debt crisis and the US economy grows — both are likely

What politicians must do: integrate European financial and economic policy more by creating an insolvency scheme for European countries, introduce a European financial government, set up a European monetary fund and a European ratings agency

The firm bases its predictions on a "scenario system", focusing not on quantitative forecasts and econometric models, but on "business" scenarios, and it concedes that this often puts it at odds with classical economists.

"We consciously seek out arguments against the mainstream forecasts," says Prof. Dr. Burkhard Schwenker, Chairman of the Supervisory Board of Roland Berger Strategy Consultants. "Given the high level of volatility, we believe that the real economy plus the fundamental strengths and weaknesses of the national economies and long-term trends are of key importance in forecasting business developments."

Roland Berger latest assessment is the fifth since the (Euro zone) crisis erupted. With the V-curve, they developed a scenario that has since become reality: a serious economic collapse was followed by an equally strong, fast upturn. In its last economic scenario in early 2011, Roland Berger was considerably more optimistic than most forecasters with "three x three"; that is, Germany would grow at 3% or more for three years in a row. The first "3" (2010) has been achieved, and the second (2011) is nearly there. The question remains, how realistic is the "third three" in this scenario, i.e. will the German economy grow by at least 3% in 2012?

This analysis was repeated under the changed financial economic and political conditions in September 2011. The result is once again an optimistic forecast. Schwenker says: "First, we do not believe there will be a repeat of the financial crisis of 2008. Second, we do not expect growth to tail off significantly in the remaining months of 2011, so we will still have a strong "3" in front of the decimal place at the year end. And, third, we are also optimistic as far as 2012 is concerned. Here we are assuming that the economic situation in the US will improve and key steps will emerge to combat the European debt crisis."

Schwenker sees vindication as the growth predictions for Germany are constantly being revised upward: "The dynamics of Germany's economic development have been systematically underestimated." However, this is no guarantee that the entire situation could change at a moment's notice: "This is exactly what we saw in 2008. Since then we know that there are two economic worlds: the real economy and the financial one. These have less and less to do with one another — and that is our core problem."

Real economy doing well

The German economy grew by a record 3.7% last year, and is growing about as fast again this year, at around 3%. This is due to increasing export demand for German products and strong domestic consumption. The labor market is booming, too: with 2.79 million unemployed and unemployment at 6.6%, analysts are currently recording the lowest levels since reunification. "The real economic situation is largely favorable, not only in Germany itself, but also in our main export markets, China, India, Brazil, Russia and the US," says Schwenker. Business figures and trading volumes are reaching peak values, and macroeconomic indicators are on an average of the last 10 years or considerably better. There is no cause for concern with commodities either: Oil prices are stable and other raw materials prices are neither excessive nor fluctuating. "So there's no real reason why people should be as pessimistic as they are right now about the real economy," concludes Schwenker.

Financial economy developing poorly

The capital markets, on the other hand, look completely different. Stock market indices have been collapsing for the last two months or so. Financial stocks have suffered particularly badly: confidence in the financial sector is low, and investors are afraid of more nasty shocks. How could the mood turn so gloomy in just a few weeks, given that the real economy is so healthy and stable? Roland Berger sees four reasons for this. First, psychology: we read bad news in the papers just about every day, and about the "euro crisis" in particular. Second, financial industry software works on a knee-jerk basis: if stock market indices exceed certain thresholds, or ratings agencies rate the solvency of investment products differently. Third, speculation: there is more speculation on the financial markets again, against euro states in crisis, falling currencies or stocks. Fourth, there has been a general loss of confidence in politicians' problem-solving abilities.

Politicians need to take more decisive action

Roland Berger demands that politicians take decisive action. "We have to create a more integrated European financial and economic policy," says Schwenker. This includes creating default procedures with clear rules for European states, plus an independent institution to apply those rules and supervise them. Also needed are a European financial government, a genuine European monetary fund and a European ratings agency. "Over the medium term, these tools will help prevent crises like the current one from emerging in the first place," says Schwenker. "However, they are too late to alleviate the acute situation in Greece. That's why we recently introduced our 'Eureca' concept, which first sets up a trust to find a realistic path the country can take to get out of debt.

For 2012, there are three ways Germany could go. The pessimistic scenario sees a slip back into recession — the W-curve, or "double dip". The second scenario predicts weak growth or stagnation. In the third scenario, the German economy could keep on growing strongly and dynamically. Roland Berger believes the last of these three courses is most probable. As the real economy growth drivers are so strong, and will remain so in the medium term, they expect growth in 2012 to be only slightly down on the two boom years of 2010 and 2011. We could see another "3" again. "We are purposely not revising our optimistic assessments for 2012 as a whole," says Schwenker, "but we're aware there are two decisive conditions involved here. First, politicians need to take credible steps to solve the European debt crisis, and, second, the situation in the US has to improve. We believe both are likely, and if we're right, the German economy is set to grow strongly for the third time in a row in 2012." For Schwenker, it's clear that "anyone who gets too pessimistic now must be blind in one eye at least. We remain optimistic."

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