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German Economy Spring 2018 - German economy closer to its limit

Martin Ademmer, Jens Boysen-Hogrefe (), Salomon Fiedler, Dominik Groll (), Philipp Hauber, Nils Jannsen, Stefan Kooths and Galina Potjagailo

No 41, Kiel Institute Economic Outlook from Kiel Institute for the World Economy (IfW)

Abstract: The air for the economic upswing in Germany is getting thinner. We expect German GDP to grow by 2.5 percent this year and by 2.3 percent in 2019 after an increase of 2.2 percent in 2017. With capacity utilization already above normal levels at the current juncture, our forecast implies that the German economy is entering a boom period. Capacity constraints already seem to limit production in the construction sector, in which capacity utilization is at historic highs according to survey data. Constraints are becoming also more and more apparent on the labour market where it becomes increasingly difficult for firms to fill vacancies. The tensions on the labour market will lead to stronger increases in gross wages and salaries. Moreover, several measures planned by the new German government will further stimulate disposable income of private households, in particular in 2019. In sum, we expect net wages and salaries to increase by 5.4 percent in 2019, the highest growth rate since 1992. Against this backdrop, private consumption will strongly expand by 1.7 percent in 2018 and by 2.3 percent in 2019. High and increasing capacity utilization will further stimulate business investment. Even though the measures planned by the new German government will structurally weigh on the budget balance, the overall budget surpluses are expected to increase in tendency further due to strong increases in government revenues caused by the economic boom. However, we expect the structural budget balance to enter negative territory again in 2019. Even the structural budget balance currently overestimates the scope for additional governmental expenditures as it only accounts for the stance of the business cycle but neither for the unusually low expenditures for debt services due to the low interest rate levels nor for additional budget burdens due to the demographic change, which will become visible in the next years.

Keywords: consumption; Forecast error evaluation; business cycle forecast; stabilization policy; leading indicators; outlook; factor model (search for similar items in EconPapers)
Date: 2018
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