Roland Berger Strategy Consultants' autumn forecast for the German economy: considerably more optimistic than established economic research institutes

• 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

After the V-curve scenario and the optimistic "3x3" growth forecast, Roland Berger Strategy Consultants presents an update to their growth scenario for the German economy. It is considerably more optimistic than the expectations issued by established economic research institutes, once again, and believes there will not be a repeat of the financial crisis of 2008. The euro crisis will continue to be the key challenge in the coming months. Roland Berger's experts advise politicians to seek to integrate European financial and economic policy more strongly.

When it comes to predicting which way the economy will go, Roland Berger Strategy Consultants and their scenario system have been going their own way for some years, focusing not on quantitative forecasts and econometric models, but on "business" scenarios. "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."

The economic assessment Roland Berger has now published is their fifth since the 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 their last economic scenario in early 2011, Roland Berger experts were considerably more optimistic than most forecasters: "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's experts see 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

The experts at Roland Berger therefore demand 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.

Key findings of Roland Berger's current economic scenario

There will not be a repeat of 2008

To the question of whether we are facing a "world economic crisis round 2," Roland Berger's experts give a resounding "no". The real economy is much more stable in 2011 than it was in 2008. There is also a major difference as far as global growth risks are concerned: in 2008, US consumer spending accounted for around two thirds of the growth in the world economy; dependency on the US was huge. Today, two thirds of the world economy is being driven by the growth of three emerging nations: China, India and Brazil. These three countries are currently growing stably and dynamically.

The financial economy's situation is much better than it was in 2008, too. In the first place, the banks' risks are lower nominally worldwide; and there is now much more transparency about existing risks, and more risk-awareness. The banks hold much more equity today also. And, last but not least, governments have regulated the markets, and today are much better armed for a crisis than they were three years ago. Regulating the banking sector has improved, for example, with Basel III, banning short selling, forced mergers and new rules on banks' own account trading. Finally, tools and mechanisms have been developed for dealing with states in crisis which did not even exist three years ago.

Economic growth in 2011: a good "3" in front of the decimal point

Even if we are not facing another crisis of 2008, the pessimism in recent weeks could have a massive knock-on effect on the real economy pretty soon and smash the aim of seeing Germany grow by 3% or more this year. "We do not believe this will have very much of a knock-on effect on the real economy, however, and we remain realistic," says Schwenker. "Our second "three" for 2011 as a whole in our spring analysis was based above all that exports would keep pushing domestic economy. And both of these have happened."

The prospects are good for 2012 – with two caveats

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. The experts at Roland Berger believe the last of these three courses to be 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."