Roland berger economic_scenario_2012_20120310

THOUGHTSEconomic scenario 2012

We did it: 3% growth in 2011. Once again, the German economy came out on top. But while the prophets of doom are back at the start of 2012, we remain confidently optimistic. Here is our 3x3* scenario

"Three times three" stands for three consecutive years of at least 3% GDP growth. This is our forecast for the German economy. We were right twice already: 3.7% in 2010 and 3.0% in 2011. And we are convinced that we will make it again in 2012 – contrary to all current forecasts.

*

THOUGHTSEconomic scenario 2012

THOUGHTS Economic scenario 20124

A LOOK BACK: WE HAVE ISSUED REGULAR FORECASTS SINCE THE GLOBAL ECONOMIC CRISIS OF 2008/09

ECONOMIC SCENARIO 2011OUR FORECAST: Undeterred by turbulence on the capital markets, the real economy stays on its growth trajectory

ACTUAL DEVELOPMENT: This forecast has so far also proved correct

ECONOMIC SCENARIO 2009OUR FORECAST: Rapid recovery of the German economy after the global economic crisis: Our V-curve scenario

ACTUAL DEVELOPMENT: V-curve happened as predicted

ECONOMIC SCENARIO 2010OUR FORECAST: The German economy can grow by at least 3% p.a. for 3 years in a row

ACTUAL DEVELOPMENT: 2010 and 2011 proved us right – 2012 is still a question mark

Three questions

on the crisis: How deep? | How long? |And how quickly will theeconomy bounce back?|We tell you what to watch out for and provide keyrecommendations.|

Fresh thinking for decision makers

CONTENT

ROLAND BERGER STRATEGY CONSULTANTS

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SCEN ARIO UPDATE: APRIL 20 09Developments in the world economy in 2010 | The effects of the crisis so far | Seven parameters determine future outlook | Four issues remain on corporate agendas

Fresh thinking for decision makersconTenT

Roland BeRgeR STraTegy conSulTanTS

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SCenario-update 2010"Three times three percent" | Our optimistic scenario for Germany | Recovery is well underway | Just like we said | And it will continue until 2012 | If not longer!

Fresh thinking for decision makerscOnTenT

Roland BeRgeR STRATeGy cOnSulTAnTS

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Scenario update 2011

THOUGHTS Economic scenario 2012 5

Economic scenario 2012

WE DID IT: 3% GROWTH IN 2011. ONCE AGAIN, THE GERMAN ECONOMY CAME OUT ON TOP. BUT WHILE THE PROPHETS OF DOOM ARE BACK AT THE START OF 2012, WE REMAIN CONFIDENTLY OPTIMISTIC.

The German economy grew 3% in 2011. The good news broke just a few weeks ago, clearly underlining what good shape the German economy is in. It's seen over 3% growth in four out of the last six years (2006, 2007, 2010, 2011). Moreover, since the global economic crisis of 2008/2009, the German economy has been growing faster than that of any other highly developed nation. The figures speak for themselves: Average GDP growth in the post-crisis years 2010 and 2011 was 3.4% in Germany compared to 2.4% in the United States and just 1.7% in Japan. Germany is growing more strongly than the rest of the triad – despite the euro crisis.

Germany's dynamic growth took almost everyone by surprise. Since the 2008/2009 crisis, forecasting institu-tions have been adjusting their predictions upward on a regular basis – no fewer than 6 times last year. In other words, the unique nature and strength of the German

economy has been systematically underestimated. But not by us. In 2009, we predicted that the economy would experience a V-curve, with a fast recovery following the big drop in 2008/2009. And that's exactly what happened. We then forecast growth of at least 3% in 2010 and 2011. We were right again.

Luck naturally played a part in the high accuracy of our forecasts. But right from the outset, we firmly believed in the inner strength of the real economy. We didn't allow ourselves to be distracted by the turbulence on the financial markets. We looked at the long-term, fundamental strengths and weaknesses of the economy and made a conscious decision not to go with the flow. We preferred to trust our own methodology (see box on page 9) and base our forecasts on what it was telling us. Now, we once again present our forecasts – this time for 2012 and 2013.

AUTHORS:Burkhard SchwenkerTobias Raffel


Germany's economy put in a surprisingly healthy showing in 2011. Yet mainstream forecasters are still pessimistic about 2012. Leading forecasting institutions predict that the German economy will grow by just half of one percent in 2012 on average. We beg to differ. We're sticking to our "3x3" scenario: three consecutive years of at least 3% growth in Germany. We believe that the inner strength of the German economy, the momentum for growth carried over from 2011, global growth potential in the US, Asia and Russia, and the chance of forging a united Europe will ensure 3% growth in the German economy in 2012 for the third year running. If, at the end of the day, Germany manages only 2.5% or even 2% growth, our scenario would be off the mark – for the first time ever – but it would still be an excellent result for the German economy and for all of us. At the very least, it would be a result worth fighting for.

In recent weeks, we have looked long and hard at the growth factors driving the German economy. We have discussed our findings with colleagues and clients around the world. The results of our investigation boil down to seven key points that support our optimistic 3% growth scenario. Let's look at them in turn.

Our 2012 German economic scenario: 3% growth

1. MANUFAC-TURING COMPETENCE IS KEYOK, our first argument – the most important one – is perhaps a rather philosophical one. But we put it in first place because it is the basis on which we build our whole scenario. We are convinced that a country's economic strength and growth potential is revealed by its compa-nies. And German firms display a unique combination of manufacturing competence and outstanding management skills.

What makes the German economy strong – and at the same time sets it apart from the economies of almost all other industrialized nations – is its excellent mix of world-leading major corporations and small and medium-sized enterprises (SMEs). No less than 500 German SMEs are world leaders in their own segments.

The actual questions we asked can be found at the end of this study


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Another 1,000 companies occupy second or third place in international markets. Our companies enjoy excellent management, are flexible and are the world's best at offering distinctive products. They often have decentral-ized structures that help them understand their local markets better. They think long term and many of them do not bow down to the false American idol of "shareholder value". In other words, they employ a ▲superior European style of management – an approach whose substan-tial benefits we will reap in years to come.

Growth potential is all about sustainable growth. And sustainable growth is feasible only if companies can reconcile their growth to the great challenges facing the planet: climate change, scarce resources and demographic change. That is to say, if they can create growth out of the way they deal with scarce resources. We need manufacturing competence so that we can balance limited resources with faster growth in productivity – through smart production systems, automation, "green tech" and energy efficiency. In other words, by achieving a smart combination of mechanical engineering, plant construction, electrical engineering and high-end technical services. Germany is particularly strong when it comes to doing just that. Accordingly, we believe that our manufacturing competence will continue to deliver significant growth potential in the future. More on this later.

2. A GOOD SPRINGBOARD IS GIVENOur second argument is considerably more tangible. Even if GDP decreased slightly in Q4, we believe that the surprisingly positive figures for 2011 as a whole will feed into continued growth in 2012. Standard indices support our argument: The GfK consumption climate index has climbed noticeably since October (from 5.2 to 5.6 points), as have the ifo business climate index (from 106.5 to 108.3 points) and the German Purchasing Managers' Index (from 49.1 to 50.9 points). These developments will give positive impetus for consumption and domestic demand – as long as we don't sow insecurity in people's minds by constantly talking the economy down.

Indeed, there's no reason for doom and gloom. Germany is on a growth trajectory. Here are the facts, in brief:

➞ German exports passed the EUR 1 trillion mark in 2011, up 11.4% or EUR 108 billion on 2010,

➞ Retail grew by 2.8%, the biggest leap in 20 years,

➞ German industry experienced its second-best year since German reunification, up 8% on 2010. The weak euro will continue to help here,

➞ Unemployment in Germany fell to 7.3% with more than 41 million people working,

▼European management style: More on this in our publication "Europa führt!" ("Europe shows the way!" Available in German only)

Die Umfragen sind niederschmetternd: Nur wenige Berufsgruppen haben in der Bevölkerung einen schlechteren Ruf als Journalisten. Im Management ist ihr Ruf noch schlechter. Eine Roland-Berger-Studie zum Informations- und Entscheidungsverhalten von Führungskräfteni

hat unter anderem nach der Glaubwürdigkeit der Journalisten gefragt. Das Resultat: Mitarbeiter und Kollegen, Professoren und Berater, „wirtschaftsfremde“ Familienmitglieder, ja selbst unmittelbare Konkurrenten im eigenen Unternehmen gelten als vergleichsweise glaubwür-

dig. Am schlechtesten stehen Journalisten da. Sie werden in punkto „Unglaubwürdigkeit“ nur noch von Politikern übertroffen.

CEOEDITION

04

BURKHARD SCHWENKER

Europa führt!PLÄDOYER FÜR EIN

ERFOLGREICHESMANAGEMENTMODELL

Lange galt das amerikanische Managementmodell als Vor-bild. Doch gerade in der Wirtschafts- und Finanzkrise hat sich gezeigt, dass der europäische Managementansatz einen Vergleich mit den USA nicht zu scheuen braucht, im Gegen-teil: Europa führt! Denn zu den Stärken Europas gehört die Leistungsfähigkeit seiner Unternehmen. Dazu kommt die Art, wie sie geführt werden. Europas Unternehmen setzen sich zunehmend von ihren globalen Wettbewerbern ab. Sie wachsen schneller, sind langfristig profi tabler, sind interna-tionaler. Genau hier setzt eine zentrale Frage dieses Buches an: Machen wir es in Europa nur besser, oder gibt es einen spezifi schen Weg einer überlegenen europäischen Unter-nehmensführung, der den neuen Herausforderungen bessergerecht wird?

Autor Burkhard Schwenker ist sicher: Wir Europäer sind her-vorragend gerüstet, uns der Zukunft erfolgreich zu stellen – mit unserer langfristigen Orientierung, gerade auch, was Beschäftigung betrifft, mit einer stärkeren Verankerung un-serer Unternehmen in der Gesellschaft, mit einem breiteren Verständnis von Unternehmenserfolg und vor allem mit un-serer humanistischen Bildung, die notwendig ist, um Urteils-fähigkeit in komplexen Situationen zu erlangen.

Dieses Buch ist zugleich ein Plädoyer für die „europäische Idee“: Weil wir ein wirtschaftlich und politisch leistungs-fähiges Europa brauchen, damit unsere Unternehmen ihre Stärken weltweit ausspielen können. Wenn wir Europäer in Zukunft global eine Rolle spielen wollen, müssen unsere Staaten zusammenrücken und zusammenwachsen – dazu gibt es keine Alternative.

CEO

EU

RO

PA F

ÜH

RT

!

04Über dieses Buch

„Wir können also festhalten, dass ne-ben der Kurzfristigkeit, der Zahlen-gläubigkeit und einer übertriebenen Kapitalmarkt- und Finanzorientie-rung als Kennzeichen des „American Way of Management“ auch das Wer-tegerüst im Hinblick auf erstrebens-werte Ziele und die Selbstsicht der Manager eine wichtige Rolle spielen. Unverblümt formuliert werden die Unterschiede zwischen Amerika und Europa und damit die Charakteristika der amerikanischen Unternehmens-führung überdeutlich:

Händler- vs. Handwerkerkultur, Gewinn und persönlicher Reichtum vs. das Streben, etwas Bleibendes zu schaffen, Shareholder return und „profi t per share“ vs. langfristige Strategien, Leadership und persön-liche Hybris vs. Management undsoziale Kompetenz.

Die Reihe ließe sich fortsetzen, damit wird deutlich, woran und warum der „American Way of Management“ ge-rade jetzt gescheitert ist und abgelöst werden sollte.“

Auszug aus diesem BuchÜber den Autor

Prof. Dr.Burkhard Schwenker

ist seit 1. August 2010 Chairman von Roland Berger Strategy Con-sultants. In dieser Funktion folgte er dem Unternehmensgrün-der Roland Berger,

nachdem er das Unternehmen seit 2003 als CEO Jahre geführt hatte. Die ein-zige weltweit operierende Strategie-beratung mit europäischen Wurzeln ist mit 39 Büros in 26 Ländern vertreten. Schwenker ist Professor an der Handels-hochschule Leipzig (HHL) und lehrt dort strategisches Management. Er ist Autor zahlreicher Bücher, Artikel und Studien, insbesondere zu den Themen Wachstum, Strategie, Unternehmensfi nanzierung und Unternehmensorganisation. Der Mathematiker und Betriebswirt arbei-tet außerdem in den Gremien mehrerer Business Schools und Universitäten mit. Burkhard Schwenker engagiert sich ne-ben zahlreichen anderen ehrenamtlichen Funktionen unter anderem als stellver-tretender Vorsitzender für die Atlantik Brücke, ist Visiting Fellow der Oxford University und Mitglied im Senat der acatech (deutsche Akademie der Tech-nikwissenschaften).

ISBN: 978-3-9814012-6-4Euro 16,80 (D)


up 535,000 on the previous year and the highest level since 1990,

➞ Inflation is running at a manageable 2.3% and the price of raw materials remains moder-ate for the moment.

➞ And: not even all the crises and catastro-phes of 2011 – the debt crisis, turbulence on the share markets, the Fukushima disaster and Germany's decision to pull out of nuclear energy – have been able to shake the stability of the German economy. Quite a remarkable achievement, and one more reason to start the new year in an optimistic frame of mind.

3. AMERICA WILL RECOVER Our third argument has to do with export markets. Germany's manufacturing competence and its good springboard will translate into 3% growth only if the markets where we sell our goods and services are open, flexible and growing – or at least picking up. This means that the United States is our starting point. Now, the US economy is arguably not as important for us these days as it used to be. For example, in 2008 two thirds of global economic growth was attributable to the US, while today that same amount is due to BRIC countries. But that's not the whole story by any means. America still sends out important signals for global growth, and the EU/US market is – and will no doubt remain – one of the biggest in the world. Together, we account for 42% of world GDP.

We believe that in 2012 and beyond, America will stimulate growth. Many analysts are arguing that the presidential election campaigns will block any growth initiatives. However, current develop-ments – particularly on the all-important job market – are positive: unemployment fell to 8.3% in January 2012, its lowest rate in three years, and

public sector layoffs, which saw the demise of more than 600,000 jobs due to budget cutbacks, are slowing down. At the same time, in January, 243,000 new jobs were created in the private sector. More importantly, with an eye to the future, Paul Volcker's call for Americans to "get back to the belief that we can produce something" appears to have hit home. The Detroit Motor Show, for instance, showed evidence that America is successfully reindustrializing its economy.

We believe that the United States has the potential to grow by at least 2.5% in 2012. Other forecasting institutions are beginning to revise their growth predictions upward, which only strengthens us in our conviction. The current Consensus Forecast (an average of leading forecasting institutions) is that the US economy will grow by 2.2%, or 0.3 points higher than the figure predicted three months back. UBS also recently raised its forecast for the first quarter of 2012 from 2.0% to 2.2%.

4. CHINA WILL NOT LET US DOWNJust as important as the US these days is China. Many analysts are warning of an impending real estate crisis in China. Some even say the crisis is already happening. There are reports of job losses and a general overheating of the economy. At the same time, growth in the fourth quarter of 2011 was almost 9%, much higher than many were expecting. We believe that the forthcoming changes in the Chinese politburo will have a positive rather than a negative impact on the economy and will lead to further growth. There is still plenty of money available for fresh economic stimulus programs.

Indeed, whatever happens on the political front, we still believe that the current five-year plan, with its focus on modernizing industry,

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stimulating domestic markets and developing "green" issues, is on the right track. To achieve these goals, China needs manufacturing competence – which we in Germany have in abundance. So German companies continue to enjoy tremendous opportunities in China. For our 3% scenario to come true, China needs to grow at a rate of "just" 7.5% to 8%. We actually believe that it will do rather better, maybe even hitting 2011 levels.

Even if, for whatever reason, growth does slow down in China, we believe that other Asian countries have the potential to step in to fill the growth gap, at least partially, and create additional growth. These countries are ASEAN members Vietnam, Indonesia, Thailand and the Philippines – but also Japan, the fourth-biggest economy in the world after the US, China and

Germany. Growth forecasts for Japan are higher than they have been for years. The Fukushima catastrophe, despite its many fatalities and the countless others who were affected by the tragedy, was a major jolt to the country. It has led to a new self-perception and self-awareness in Japan that could easily translate into faster growth. South Korea is another important player. Here, Samsung has just announced one of the biggest investment programs ever: more than USD 41 billion this year alone.

We are not an economic think tank and take a different approach to forecasting: Instead of relying on econometric models, we use scenarios that reflect our entrepreneurial experience on global markets – and in doing so we consciously challenge the mainstream.

1 2 3 4 5OUR METHOD: CREATE SCENARIOS AS ENTREPRENEURS

SYSTEMATIZE FORECASTING

First we systemati-cally compile various facts, figures and opinions provided by others.

DEFINE MAINSTREAM

We then use them to define the mainstream: we identify averages using existing forecasts and cite representative expert opinions.

QUESTION THE MAINSTREAM

The third step is to conscious-ly seek out arguments and data that contradict the mainstream. Here we use "symbolic" developments and impressions, such as China's Expo 2010, which really showed off the country's strength. We also look to products lauded at trade fairs, persuasive political visions and much more.

ANALYZE AS ENTREPRENEURS

We take the entire picture created by impressions and figures and ask our consulting experts around the world to examine it. They know their clients, industries and markets inside and out and can incorporate personal views from select clients.

FORMULATE SCENARIOS

Finally, we develop our own opinion based on this analysis and formulate a scenario we believe to be likely. This scenario is based on our qualitative assessment and under- pinned by selected quantitative values.


5. RUSSIA, BRAZIL AND INDIA WILL PLAY THEIR PARTOur fifth argument relates to the other BRIC countries. Our optimistic 3% economic scenario relies on fast growth in these countries, creating opportunities for German firms. The prospects for growth look good:

➞ Russia is finally back playing an important role for German business. Last year, exports from Germany to Russia rose by nearly 32%, to more than EUR 30 billion. Russia's joining the WTO means even greater opportunities for us. Whatever the political situation, we believe that Russia will contribute to our growth in 2012.

➞ Brazil is hosting two major upcoming events: the soccer World Cup in two years' time and the Olympic Games in 2016. The associated investments in infrastructure and technology will give a positive boost to German companies.

➞ Last year, India grew by 7.6%, faster than many were expecting. We believe it will grow by at least 7% in 2012. Germany's ever closer involvement in India means more growth potential. There is certainly a solid platform for further growth, as summarized by the Indo-German Chamber of Commerce's motto for this year – "India and Germany: Infinite opportunities".

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6. THE MACRO-ECONOMIC SETTING WILL REMAIN STABLEOur first five arguments for a positive economic outlook relate primarily to regional growth potential for Germany. Before we move on to Europe – our most difficult argument – let's take a quick look at the other factors that underlie our optimistic 3% forecast: no credit crunch, no new protectionism, no exploding raw materials prices. We are confident that all these threats can be avoided. Here's why:

➞ There is currently no sign of a true credit crunch. The central banks have at last made enough cheap money available to the markets and there is no evidence that well-managed companies are having any difficulty securing financing on acceptable terms. Further bank failures, which destroy confidence between market participants and cause the flow of money to rapidly dry up, are unlikely at the present time.

➞ One undeniable danger is that 2012 will see new trade barriers being set up, hindering global trade and international cooperation. Last year, the number of such barriers grew by 53% according to the WTO. Recent examples include Mercosur's 30% tax increase on imported cars, China's momentous self-imposed restriction on the export of rare earths, the battle between the EU and the US over subsidies for Airbus and Boeing, and China's punitive duties on US cars. A trade war between China and the US would have immense ramifications for the global economy. Fortunately, such a trade war is highly unlikely. The threats we have heard in this direction in 2012 – a year in which both

2011

2008

+3.0%

–5.1%

+1.3%

+3.7%

2006

2007

2009

2010

+3.7%

+3.0%

+3.3%

0.0%

3% GROWTH OR MORE IN 4 OF THE LAST 6 YEARS GERMANY'S GROWTH RATES FOR THE LAST 6 YEARSGermany passed "our" 3% threshold four times

OUR "MOOD BAROMETER"THE ROLAND BERGER BUSINESS INDICATOR

80%* of our more than 200 Partners worldwide rate the current situation on their markets as average, good or very good. And the picture for the coming months is even better: 92%* assume that business will remain stable or improve.Very good/good

34%

Average

46%

Poor/ very poor

20%

100%

*80%

BUSINESS SITUATION AS OF

FEBRUARY 2012

BUSINESS EXPECTATIONS FOR MARCH TO MAY

Stable

60%

Worse

8%

Better

32%

*92%


countries may see changes in their national leadership – are chiefly due to campaign politicking.

➞ Raw materials: In recent months, oil, gas, steel, copper, aluminum, zinc and other raw materials have not been in short supply, nor have their prices risen greatly. We believe that over the coming 12 months, the prices of raw materials will remain within the ranges seen in recent years. As such, they should present no obstacle to the development of the German economy. Oil currently costs USD 116 a barrel, a good USD 30 (20%) below its peak price in recent years (USD 145 in June 2008). So even if the price of oil were to go up, the global economy would not come apart at the seams overnight. Of course, we do not know at present whether the Iran crisis will escalate. But most geopolitical forecasts assume that such an escalation – the impact of which would, of course, go far beyond the oil price – is unlikely.

7. EUROPE WILL RESOLVE ITS DEBT CRISISOur final argument for our 3% forecast is the most difficult one of all: Europe. Regional growth and manageable raw materials prices will be no good to us if we cannot get Europe and the debt crisis under control. The situation remains complex and intricate. But we believe that Europe will manage to find a solution, for the following reasons:

➞ The eurozone bailout funds – the EFSM and ESM – should fully come into their own by the middle of the year, as planned. In any case, the recent downgradings by rating agencies do not appear to have brought countries to their knees: France and Spain recently secured cheap new money and the stock markets remain cautiously optimistic.

➞ With the introduction of the ESM, there is at least a chance that a proper insolvency code will be drawn up for European countries. Witness the planned strengthening of the Commission's role in national budgetary questions and the new function of the Euro-pean Court of Justice.

➞ We are seeing the beginnings of an "economic government of Europe", or whatever name it will ultimately go by. At the very least, today it is no longer politically incorrect to talk about closer European integration, as it was just a few months back. That is perhaps the biggest sign of progress.

➞ Finally, the chances of a European rating agency being set up are growing. We have made significant progress on this in recent months. If nothing else, it is important as a visible symbol of a new European identity.

We believe the timing of these points is less important than the dedication and conviction with which they are implemented. It seems to us that now, at long last, they are being dealt with in a serious and determined fashion. Of course, further compromise will no doubt be necessary given the complexity of the required regulatory framework. The coming summits will show how successful we are in launching a new growth policy for Europe. And we believe that growth is what is needed first and foremost to help those countries at risk, such as Italy, Spain and France. That means an aggressive monetary policy and an acceptance of higher inflation rates. It also means the EU deciding to revitalize its internal market again to provide fresh growth stimuli. Mario Monti's report to the Commission two years ago can serve as the blueprint. In it, he addresses all the relevant points: transportation systems, digitalization, a free market for industrial and business services and freedom of movement for workers, coupled with the gradual integration of Europe's social security systems.

We are fully aware that Europe – and the euro – are not out of the woods yet. But we are also convinced that the situation can be turned to good only if we start thinking and talking

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differently about Europe. We need to drop the unconvincing message that there is no alterna-tive to Europe, an idea that generates neither optimism nor empathy. Instead, we need to fashion a new European identity and recognize our European strengths. Two such strengths are fundamental and underlie our optimistic forecast: ▲our culture of craftsmanship and our culture of consensus:

➞ By a culture of craftsmanship, we mean that Europe strives to create something lasting, sustainable and enduring – not just for the sake of short-term success and personal wealth. Craftsmanship lies at the heart of our manufac-turing competence, not just in Germany but also in France, Northern Italy, Scandinavia and Eastern Europe.

➞ And our culture of consensus? It is easy enough to call for clearer decision-making, stronger leadership – an approach typical of the British and American business worlds. But assigning all authority to a single body or individual within an organization comes at a price: the risk of oversimplifying matters, polarizing people, underestimating dangers and skirting around issues. Achieving consen-sus is a time-consuming, wearisome process that offers fewer opportunities for individuals to take center stage. On the other hand, it has the potential to deliver long-lasting solutions and improvements. Consensus leads to inclusion rather than exclusion, sustainable solutions rather than stopgap measures.

Focus on these fundamental strengths – European values, our manufacturing compe-tence, our (superior) management skills, our culture of craftsmanship and consensus – and the picture of Europe that emerges is more positive than some seem to think.

These are the seven points underlying our optimistic economic forecast. As we said at the outset, we believe that the inner strength of the German economy, the beginnings of an integrated Europe, the positive momentum carried over from a strong 2011 and the growth potential for our companies around the world – in the US, Asia, Russia and Brazil – mean that Germany can achieve 3% growth in 2012 for the third consecutive year. One further argument in support of our forecast for 2012 comes from our own barometer, the Roland Berger Business Indicator (see box on page 12). When asked about the current business situation in February 2012 and their business expectations for the coming three months, the overwhelming majority of our 200+ Partners around the world were decidedly upbeat. Some 80% said that the current situation in their markets was average, good or very good. As many as 92% thought that business in the next three months would be stable or show further improvement. That's the most positive result shown by our indicator since we introduced it!

Burkhard SchwenkerThomas Clark

The European WayA Culture of Craftsmanship and Consensus as Beacon for the Global Economy of the 21st Century

▼Europe's culture of craftsmanship and consensus: More on this in our upcoming publication "The European Way"


EUROPE/GLOBAL ECONOMY

Europe and the global economy: Our outlook for 2012So far, our attention has focused on Germany. In discussing the strength of German exports, we have also touched on major regions of the world. But what about the global economy overall? And will Europe as a whole grow this year? If so, by how much? Here are the arguments we've presented so far:

➞ The US economy is picking up. With the current recovery in the job market and continuing reindustrialization, we believe a growth rate of 2.5% is possible.

➞ The BRIC countries are also looking good. China will achieve at least 8% growth with the help of its current five-year plan and the related modernization of its economy. We expect to see 7% growth in India and at least 4% growth in Brazil, in the latter case thanks to the upcom-ing major events to be held there. Russia should also manage a good 4% growth following its accession to the WTO.

➞ For other countries outside Europe, our forecasts are generally in line with those of the IWF: good 5% growth in ASEAN countries, nearly 4% in Latin America (excluding Brazil), just over 3% in North Africa and the Gulf States

and around 5% in the rest of Africa. We are more optimistic about Japan, however, where we predict around 2% growth thanks to the new dynamism driving the economy.

Predicting whether Europe will see growth overall is most difficult of all, of course. For Germany, we base our forecasts on the fact that Germany's above-average manufacturing competence means that it stands to profit more than other countries from global growth. When it comes to Europe as a whole, the picture is more complicated:

➞ France is key to Europe's overall growth. Economic research institutions currently expect France to stagnate. However, the country's underlying manufacturing competence and the fact that it is drawing noticeably closer to Germany's economic policies lead us to believe that it may do better than predicted. In fact, we're forecasting 0.5 to 0.75% growth this year in France – bearing in mind that upcoming election campaigns may lead to a change of direction.

GDP FORECASTS FOR 2012

* All forecasts are from Consensus, except BRIC countries and World (IWF) as well as Greece, Portugal and Poland (EIU)Source: Consensus 1/2012, IWF 1/2012, EIU 1/2012, in-house calculations

OUR FORECASTSFORECASTS BY INSTITUTES*

World

3.3

3.5 - 4.0

0.0

UK PolandFrance

Portugal GreeceSpainItaly

-1.3

-3.0-2.8

-0.4

2.5

0.50.5 - 0.75

-1.0

-3.0

n.a.-0.4

3.0

0.5

China India Brazil Russia

8.2

7.0

3.03.3

> 7.5

7.0

4.0 4.0

Germany EU USA Japan

0.5 0.0

2.21.9

3.0

1.0

2.5

2.0


➞ It is easier to foresee what the future holds for countries on the southern fringes of Europe. Greece will shrink significantly, come what may, and Portugal will share a similar fate (-3%). The forecast for Italy and Spain is decidedly sunnier. Thanks to the course currently being pursued by Mario Monti and the manufacturing strength of the north of the country, Italy could limit its "negative growth" to just 1%. The new job market reforms in Spain mean that it may get away with a decline of just -0.4% (Consensus).

➞ Northern and Eastern Europe are a different ball game. Many countries here will enjoy growth rates of 2% or more. We predict almost 3% growth in Norway, 2.5% to 3% growth in the Baltic states, and up to 3% growth in Poland, thanks to its manufacturing competence.

➞ The United Kingdom is a special case. Putting aside for a moment the political discussion with regard to Europe and the UK (continental Europe's growth potential is not dependent on the UK), we expect to see sluggish economic growth (0.5%) due to the UK's manufacturing weakness, despite the action that has already been taken on this front.

SUMMARYWe believe that the EU can achieve overall economic growth of around 1% in 2012 – considerably more than the figures currently put forward by the IWF (-0.5% for the eurozone) and Consensus (0.0%). This is on the condition that Europe manages to achieve a healthy balance between austerity and growth, the necessary savings programs and new growth initiatives.

For the global economy, we predict a growth rate of somewhere between 3.5% and 4%, similar to 2011. That puts us a good half a percentage point higher than other mainstream forecasters. The reason? We believe that global growth in 2012 – unlike in the past two years, where growth was driven almost exclusively by the BRIC countries – will be spread more evenly across different regions.

EUROPE/GLOBAL ECONOMY


Let us conclude our economic scenario by briefly looking ahead to Germany in 2013. To make sure we are all on the same page: Most forecasters expect 2012 to be a difficult year followed by a return to more powerful growth in 2013. We disagree with the pessimism regarding 2012 – see above! – but do see the danger that the 3% growth rate of recent years could come to an end in 2013. Our reasons are as follows:

➞ A large number of empirical studies show that, in the long term, advanced economies don't tend to grow by much more than around 2%. In other words, the current phase of 3% growth is unusually good, and probability alone suggests that this is unlikely to continue.

➞ Most of the ground lost to the global economic crisis in 2008/09 has now been regained. While the German economy shrank by 5.1% in 2009, the past two years have made up for the entirety of this slump. So there is no more catching up to do.

➞ Most important of all, the positive impact of the Agenda 2010 reforms is fading noticeably nearly ten years after they were introduced.

And what comes after 2012?Germany needs Agenda 2020!

Our country is still benefiting from the funda-mental change of direction given to labor market and social policy. Having said that, most of the (modest) growth stimulus provided by making it easier to dismiss workers, cut non-wage labor costs and boost SMEs has now been used up – not least because other econo-mies have become more competitive again at the same time.

THE CORNERSTONES OF AGENDA 2020We therefore see a significant risk that, follow-ing a strong showing in 2012, our current growth trajectory could crumble in 2013. Unless, of course, Agenda 2010 can be replaced by a new Agenda 2020. Just as the EU must now launch new growth initiatives to revitalize its internal market (our seventh argument for growth), Germany too must move swiftly to create new opportunities and potential for our


economy. Looking back, Agenda 2010 was spot on and singularly important to German economic development. Yet even so, the new reform project must differ on a number of key issues. In our view, the following points are the most important:

➞ More growth instead of more flexibility: Agenda 2010 centered primarily on loosening up rigid structures and making the labor market more flexible. The focus now, however, must be on generating fresh stimulus for growth. Ten years ago, we rose to the challenge of fundamen-tal changes posed by a flexible global economy. In the face of dogged resistance, obsolete rules and practices were overhauled. Today the focus must be on laying the foundation for further growth.

➞ Education and new industries instead of the labor market and social welfare systems: Ten years ago, the labor market and social welfare systems were at the core of the reforms. However, Agenda 2020 must revolve around two other pivotal policy areas: education and new industries. One aspect of this involves at last improving mobility: The influx of young workers will be a critical topic. Another is making systematic use of the shift in energy policy to drive further manufacturing growth.

➞ Collaboration across sectors: The kind of agenda we are talking about works best when the political and business communities pull together – and when other stakeholders such as the scientific community and the charitable foundations play their part too. In education and R&D, many innovative solutions are fashioned at the point where the government, the economy and the non-profit sector intersect and interact. The goal of any new agenda must be for specific initiatives to reinforce this interaction in a way that benefits German companies.

We are convinced that Germany has exactly the right capabilities for a new agenda. Going back to our point of departure, our manufacturing competence creates the conditions for innova-

tive solutions in modern sectors such as high-end green technologies, energy and resource efficiency, mobility and smart produc-tion systems. Thanks to its dual system of vocational training, Germany also has the chance to maintain its lead in productivity by recruiting excellently trained people in the future. The important thing now is for intelli-gent policies and the right conditions to assist both areas in such a way that we do not lose the momentum seen in recent years. Maybe then 2013 can really carry on where 2012 leaves off and sustain the 3% growth trajectory.

AGENDA 2020

"THE PESSIMIST SEES DIFFICULTY IN EVERY OPPORTUNITY. THE OPTIMIST SEES THE OPPORTUNITY IN EVERY DIFFICULTY."

Providing nothing unusual happens (and we hope it

doesn't!), our next scenario update should be out in the

summer. In the meantime, let us take to heart the

words of Winston Churchill:


1. EUROPE DURABLE SOLUTIONS OR THE CONTINUED EROSION OF TRUST?

• Will the recent decision to accept European fiscal union (including stricter budget rules and automatic sanctions) be rigorously implemented?

• Will the EFSF and ESM turn out to be potent medicine in preventing and curing critical debt situations?

• Does the EFSF and do larger eurozone countries still need to fear further credit rating downgrades? If so, will they have a negative impact?

• Will we see a European insolvency code for sovereign states?

• Will Greece have its debts canceled (or achieve an orderly exit from the eurozone)?

• Will the Spanish and Portuguese governments succeed in convincing their people of the need for austerity programs?

• Will financial and economic policy integration within the eurozone continue ("economic government")?

• Will the European Central Bank keep up its expansive monetary policy?

• Will the political arena change the tune of its communication about Europe (with a positive, go-ahead message instead of a dour lack of alternatives)?

• Will we strike the right balance between austerity programs and growth initiatives?

2. GLOBAL ECONOMIC GROWTH DRIVERSWILL BRIC AND THE US LEAD THE WAY WITH FAST, FORCEFUL GROWTH?

• Will China grow by at least 7.5% to 8%? • Will the US manage a sustainable turnaround on its labor market (or will the electoral campaign effectively put all initiatives on hold)?

• Will Brazil create new potential for growth (>4%), especially thanks to the investments associated with upcoming major events (the soccer World Cup and the Olympic Games)?

• Will Russia manage 4% growth (by continuing to modernize and joining the WTO)?

• Will India maintain its growth trajectory (>7%), or will corruption hinder ongoing development in the long run?

• Will post-Fukushima Japan turn the corner and experience fresh and forceful growth (of over 2%)?

• Can stimulus from the ASEAN countries Indonesia, Thailand, the Philippines and Vietnam make up for other growth drivers' shortcomings?

• Will upcoming elections in China, India, Russia and France influence global growth potential?

GROWTH FACTORS: OUR CRITICAL QUESTIONS (EXTRACT)

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3. FINANCIAL SYSTEMSTABILIT Y AND REFORMS OR A SOURCE OF TROUBLE?

• Will we see a credit crunch or will the financial system be able to fund the investment needed to fuel growth on reasonable terms?

• Will trust in banks and financial managers be restored?

• Do banks' business models work and are they are crisis-resistant?

• Are the currently targeted capital ratios enough?

• Has enough been done to guard against further write-downs on the treasury bonds of crisis-ridden eurozone states?

• If the US goes ahead and separates commercial and investment banking, will the ban on proprietary trading (known as the "Volcker rule") be enforced?

• In the medium term, will the "Tobin tax" on financial transactions apply not only in Europe but throughout the world?

• Is further turbulence on the capital markets to be expected? And will it affect the real economy?

4. PROTEC TIO N-ISMNEW BARRIERS OR MORE OPEN WORLD TRADE?

• With the WTO stating that barriers harmful to trade increased by 53% in 2011, will further trade restrictions ensue?

• If the WTO cannot make progress, will bilateral and regional trade agreements succeed?

• What will be the impact of Russia's accession to the WTO after 18 years of negotiations?

• Will 2012 election campaigners be able to resist the temptation of protectionism?

• Will the climate of negotiations in the Doha round improve?

• Will the EU countries and the US act on their stated intention to dismantle farm subsidies to the benefit of developing countries?

• Will China, India and other emerging countries give Western countries easier access to the markets for capital goods and services?

• Will China impose even greater restrictions on the export of rare earths?

• Will the dismantling of trade restric-tions between the US and Europe free up additional growth potential?

5. RAW MATERIALSSIDESHOW OR NEW PROBLEM CHILD?

• Will oil price hikes remain within tolerable limits (not exceeding 15%) in the foreseeable future?

• Will the Iran crisis escalate? And if so, are there enough ways to quickly compensate for the loss of Iranian oil?

• Will the growing price differential between Brent (the European reference price) and WTI (in the US) lead to an imbalance in growth potential?

• Will politically motivated actions – by OPEC, Iran or China, etc. – drive raw materials shortages and/or significant price increases?

• Will the price of other raw materials (copper, steel, etc.) increase moder-ately, as expected, or is there the danger of substantial upheavals?

• Will the increasing consolidation of raw materials producers negatively impact prices in the short term?

LIST OF QUESTIONS

THOUGHTSEDITOR

Roland Berger School of Strategy and Economics

Roland Berger Strategy Consultants Holding GmbHMies-van-der-Rohe-Str. 680807 München Germany+49 (89) [email protected]/RBSE

THE AUTHORS WILL BE GLAD TO ANSWER ANY QUESTIONS YOU MAY HAVE

Prof. Dr. Burkhard SchwenkerChairman of the Supervisory Board+49 (40) [email protected]

Dr. Tobias RaffelSenior Expert+49 (30) [email protected]

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