The DIW conducted an estimate on behalf of the Berlin daily paper Der Tagesspiegel, coming to the conclusion that it would take at least until 2011 for the economy to recover.
“The recession was extraordinarily steep, and would not have been nearly as bad if it was not for the financial crisis,” Stefan Kooths, economist at the DIW told the paper.
A global collapse was triggered by the failure of US bank Lehman Brothers on September 15 last year, leading to a credit crunch as financing dried up and banks needed significant capital injections from governments and central banks to stay afloat.
But the global economy was already in a downturn before this even happened, said Kooths. “It would have probably only have been a mild recession without that,” he suggested, with the German economy managing weak growth during 2009 and a slight contraction during 2010.
Now though, the government is predicting a reduction in gross domestic product of around six percent over this year. A slight improvement in the second quarter of the year prompted some to suggest the reduction could be around four percent.
Many economists are predicting a slight uptick next year, although around €250 billion in productivity has been lost through the recession, the DIW said.
“That is an enormous sum, a big drop in terms of living standards,” said Kooths. “The recession was much tougher due to Lehman – and the collapse of any bank with a similarly international network of connections would have probably had the same affect.”
International trade will be important for the recovery though, said Kooths. “Powerful growth rates will be needed if, by the end of 2011, the worst dents are going to be eliminated. The drive for this catch-up will have to above all come from abroad. Whether the global economy recovers fast enough for this is in no way certain.”
And he warned of further job cuts next year, as firms continue to be under pressure, with reduced order books.
He said that the fear of the next generation being saddled with enormous debts because the government has supported the banks and industry was not right. “The national debt has risen massively,” he said. “But Germany in total is not made poorer by this. The coming generations do not only inherit the debts, but also the government bonds [issued to raise the money].”
But the difficulties will arise when the next generation has to decide how to raise the money to service the debt. “That is not a pleasant inheritance,” Kooths said.