## 5/15/11

### How long will last real economic growth in Germany

Germany has demonstrated an extraordinary increase in real GDP in 2010: +3.6 per cent.   In the first quarter of 2011, the level of real GDP was 5.2% above that in the first quarter of 2010. This jump is especially desirable after the tremendous fall in 2009: -4.5 per cent relative to 2008. After this strong fluctuation, the question is how strong in the growth trend for the German economy?  One can find a quantitative answer to this question and a long-term prediction of real GDP per capita in Germany up through 2020.

Several months ago we presented log an empirically correct model of real economic growth in Germany. Our concept describing the evolution of real Gross Domestic Product (per capita) is very simple and is based solely on the age structure in a given developed country. Since Germany does not carry out censuses as many countries do, the age pyramid is obtained from administrative record and partial censuses. It makes the final result less accurate and influences our prediction of real GDP in Germany.

We have empirically and statistically proved that the growth rate, g(t), of real GDP per capita, G(t), is driven by the attained level of real GDP per capita and the change in a specific age population, Ns. According to our model, the asymptotic growth rate of real GDP in developed countries can be completely characterized by constant annual increment A = const. All fluctuations around this constant increment can be explained by the change in the number of people of the country-specific age:

g(t) = dlnG(t)/dt  = A/G(t) + 0.5dlnNs(t)/dt                                            (1)

Equation (1) is the quantitative model that has been constructed empirically and tested statistically.

We published a preliminary model for Germany severalyears ago; before the 2008/2009 recession. The best fit constant increment is (A=) \$260 (1990 US dollars, as published by the Conference Board) and the defining age is eighteen year. The age distribution from 2002 allows a prediction at an 18-year horizon. The original model displayed in the upper panel of Figure 1 suggested a slow-down in 2009 and likely a deeper recession in 2011, with a year of growth in 2010. On average, the beginning of 2010s was characterized by very poor performance of the German economy.

The lower panel in Figure 1 extends the observed curve through 2010. The predicted curve did not change. Overall, we predicted the fall in 2009 and the growth in 2010, with smaller amplitudes, however. This might be the result of severe smoothing of the age pyramid.  (Here, we would like to emphasise again that the prediction of the 2009 slowdown could be easily obtained in 2002, i.e. seven years before it happened!) Figure 2 presents a smoothed version of both curves in Figure 1. Three-year moving averages, MA(3), show a much better fit than the annual curves. Therefore, we do not change our forecast for 2011 and for the future decade. The German economy will not be growing fast. Immigration may induce only extensive growth in real GDP but not in GDP per capita.

Figure 1. Observed and predicted rate of real GDP growth in Germany after the reunification. The predicted curve is obtained from relationship (1) with A=\$260.
Figure 2. The original curves in Figure 1 smoothed with MA(3).