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General outlook
The outlook for the German economy has become brighter again following the slowdown towards the end of 2012. Despite the continued existence of negative factors caused by the tensions in the euro area, the adjustment in the level of investment in machinery and equipment and exports is so far advanced that it could give way to a modest upturn. Although there has been no fundamental change in the underlying conditions, there has, above all, been no major deterioration either.
In the first quarter of 2013, the incipient economic upturn was delayed by the especially persistent winter weather. In the second quarter, however, the improved underlying trend should come to the fore, reinforced by catch-up effects. If this happens, the German economy, despite the weak winter half year, may achieve economic growth of 0.3% (calendar- adjusted: 0.4%) on an annual average in 2013, compared with 0.7% (calendar- adjusted: 0.9%) in 2012. The cyclical trend, which is better described by the fourth- quarter annual rates, could increase initially from 0.3% in 2012 to 1.3% in 2013 and then to 1.5% in 2014. This would also give annual average GDP growth of 1.5% in 2014; aggregate capacity would be well utilised, the labour market would be buoyed by economic activity, and, given the currently planned fiscal policy course, the general government budget would be balanced. Consumer price inflation (HICP) should moderate for a time, to 1.6% in 2013 and 1.5% in 2014, owing to the effect of declining crude oil and commodity prices.
The risks to this forecast are largely on the downside. Much will depend on whether the economic situation stabilises in the euro area crisis countries and whether expansionary forces will gain the upper hand there. A slackening of consolidation and reform efforts, on the other hand, could have a negative effect on the financial markets. If greater opportunities were to present themselves to the German economy, however, it is likely to be in a position to use them, since enterprises are mostly in good shape, provision of financial resources is abundant, and immigration is helping to counter shortages in the labour market.
Basel III
The G20 leaders' direct response to the financial crisis was to adopt an action plan aimed at strengthening the resilience of the financial sector, and thus reinforcing financial stability. A core element of this package of measures, referred to collectively as the Basel III framework, is a fundamental improvement in institutions' capital and liquidity. The banks are required to hold not just higher-quantity but also higher-quality minimum capital reserves, which will also distinctly improve their loss absorbency.
The Basel III framework will be implemented in Europe by the CRD IV package, consisting of a regulation which is directly applicable legislation and a directive which needs to be transposed into national law.