German Economy Spring 2017 - Expansion is set to broaden

Jens Boysen-Hogrefe, Salomon Fiedler, Dominik Groll, Nils Jannsen, Stefan Kooths, Martin Plödt and Galina Potjagailo
Authors registered in the RePEc Author Service: Martin Ademmer

No 29, Kiel Institute Economic Outlook from Kiel Institute for the World Economy (IfW Kiel)

Abstract: The expansion in Germany continues. We leave our forecast as of December 2016 unchanged and expect GDP to grow by 1.7 percent in 2017 and by 2 percent in 2018. The somewhat weaker growth rate in 2017 results from the lower number of working days. Overall, the expansion is set to broaden. While consumption is expected to increase with lower rates, exports and investment will gain momentum. Private consumption was one of the growth engines in the last two years as it expanded with 2 percent in both years; for Germany a remarkably high rate. However, the oil price-induced increase in consumer prices from 0.5 percent in 2016 to about 2 percent will weigh on real disposable income. Subsequently, private consumption will only expand by 1.2 percent in the current year and by 1.5 percent in 2018. Also growth rates in government consumption are expected to decline because the stimulating effects of the refugee influx are phasing out. Government consumption will grow by 2.5 this year and by 1.6 percent next year after having reached its highest growth rate (4 percent) since 1992 in the last year. In contrast, exports will regain momentum as the world economy is expected to grow with somewhat higher rates. In 2018, we expect exports to expand by about 5 percent, after an increase of 3.7 percent in the current year. Also, investment will increase with higher rates. In the past quarters, business investment was dampened by high policy uncertainty stemming from the uncertain international environment. With uncertainty phasing out, business investment will regain momentum given that capacity utilization is already above normal levels and business confidence is very high. Construction activity will remain to grow with very high rates, as financing conditions are still very supportive. The general government budget balance will remain in positive territory close to 0.5 percent relative to GDP over the forecast period. However, the budget surplus is mainly due to high revenues with the economy already operating above normal levels of capacity utilization. The structural budget balance, which takes capacity utilization (measured via the output gap) into account, is expected to reach negative territory again in 2017 and to further decline in 2018. The labor market remains in a good shape. A revision of employment data from March revealed that employment grew with strong rates over the course of last year while earlier data releases indicated a remarkable slowdown in employment growth.

Keywords: business cycle forecast; stabilization policy; leading indicators; outlook (search for similar items in EconPapers)
Date: 2017
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