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The German economy is growing strongly - no signs of overheating

Press Release of March 19, 2015

DIW economic experts are forecasting a growth of 2.2 percent in 2015, which should stand at 1.9 percent in 2016 - capacity utilization at nearly normal levels - foreign markets less important than before the crisis - primary growth driver is private consumption based on a good labor market - surpluses in public budgets remain high - international risks remain significant

The German economy, which is currently exhibiting strong growth, will continue to progress in this direction with capacity utilization at nearly full levels. The economic experts at the German Institute for Economic Research (DIW Berlin) predict that it will grow by 2.2 percent this year and by 1.9 percent year. Experts see no signs of overheating, since the important markets - such as the euro area and China - are showing only slight developments. Additionally, investments are increasing only modestly. Instead, private consumption will continue to support growth through strong income gains and favorable developments in the labor market. Despite the overall favorable outlook, there remain economic risks: For example, the financial markets could tighten significantly in response not only to a resurgence of the crisis in the euro area, but also to an intensification of the conflict in Ukraine.

IN BRIEF

Marcel Fratzscher (president of DIW Berlin): Marcel Fratzscher: "The German economy is growing strongly thanks to the strong labor market, but also to low energy prices and the devaluation of the euro. However, the world is different than it was before the crisis: Exports play a smaller role, because important markets—primarily the euro area—have lost momentum. Private consumption is  becoming more and more the driver of growth."

Ferdinand Fichtner (Head of the Department Forecasting and Economic Policy): "The German economy continues to grow. At the moment, we see no signs of overheating. Given the gloomy outlook for sales in export markets and the continuation of high risks in the global economy, investments are expected to grow only moderately in comparison."

Simon Junker (Deputy Head of the Department Forecasting and Economic Policy): "Private households are currently benefiting from the strong expansion to pensions, and especially from the reduction of energy costs. With these effects fading, private consumption will not remain as strong as it is now —but thanks to the good situation in the labor market and marked income growth, it will also continue to grow considerably."

Kristina van Deuverden (Expert for Fiscal Policy and Public Finances): "For now, high surpluses in the public finances are indicative of a truly positive situation. But that’s not entirely true. Firstly, in Germany public debt is not a cause for concern. Secondly, the nominal figures reflect only part of the situation once again. Adjusted for cyclical influences, the surplus has actually declined to a large extent because funds are not being utilized sustainably."

Growth in Germany supported more and more by consumption

After experiencing a strong first half of 2015, the German economy is expected to return to normal levels of capacity utilization, and then to grow at rates that correspond to its potential growth. Growth will be driven first and foremost by consumer spending, based primarily on the labor market, where the rise in employment continues. For 2015, the experts expect roughly 300,000 new jobs and an unemployment rate of 6.4 percent; in 2016, they expect approximately 200,000 new jobs and an unemployment rate of 6.1 percent. The much-feared negative impacts of minimum wage on employment have so far failed to materialize. Wages are expected to keep rising noticeably, and expansions to pension benefits should temporarily provide a hefty income boost; both will spur consumption. According to the DIW estimates, the significant drop in oil prices has increased consumers’ purchasing power: Households will use the resulting margins, at least in part, for other kinds of consumer spending. The inflation rates are likely to be at 0.5 percent this year, and at 1.2 percent next year.

Construction investments, which have been strong recently, will lose momentum primarily due to dwindling opportunities for profit in residential construction. Due to the ongoing gloomy outlook for sales in foreign trade, corporate investments in equipment and machinery are experiencing only subdued growth, and remain below pre-crisis levels in relation to the GDP. According to the DIW assessment, exports will rise noticeably, albeit at a slower pace than in the pre-crisis years. In a climate of strong domestic demand, imports also rise noticeably; therefore, foreign trade altogether will contribute little to growth. Due to the sharp decline in import prices, however, the current account surplus will increase to 8½ percent in this year and next year.

In the coming years, as well, solid surpluses are expected in public finances

Government revenue is expanding considerably. While the development of wages and profits enhances direct taxes, the creation of jobs, covered by social insurance, boostssocial contributions and the strong development of private consumption increases indirect taxes noticeably. According to DIW’s estimation, the public sector will therefore finish off both years with significant surpluses. But due to loose spending behavior, the days of steadily improving public finances are over: This year, the surplus amounts to €15 billion euros; in 2016, it will be €one and a half billion euros less . Above all, the transfer expenditures and other consumption expenditures continue their strong increase, while the additional effects on public investments are reduced.In relation to GDP, the surplus in both years stands at roughly ½ percent.

Global economic environment: Slow recovery continues in Europe and in the world

According to the economic experts at DIW, the world economy will grow in 2015 and 2016 by roughly 4.0 percent each year. The rate of expansion would thus still be somewhat weaker than it was before the global financial crisis—but higher than in the past three years. In some developed countries—particularly the U.S. and the U.K.—the upswing is robust. The sharp fall in oil prices, as well as further loose monetary policy are conducive to the expansion. Growth in key emerging markets such as China and Brazil, however, is likely to lose momentum. In the euro area, growth remains low; with rates of 1.3 percent this year and 1.5 percent next year, it is gradually leaving the crisis behind.

Indeed, the purchasing power of private households is increasing due to the considerably lower energy costs. Yet no significant results are expected from net exports—despite the weak euro—and investments should rise only gradually: Financial conditions are improving, to be sure; however, in the crisis-stricken countries in particular, deleveraging remains high on the list of priorities for many corporations. The very low inflation rates, and even deflationary developments in individual countries, burden the economy and make it difficult for private and public deleveraging, since pressure on prices weigh on businesses’ cash flows, and crumbling tax revenues burden the reduction of public debt. The European Central Bank’s new bond-purchase program should, due to the already very low interest rates, have only a limited impact on economic activity and price development.

Significant economic risks

From the perspective of the Berlin-based economic experts, the risks to economic development remain high: Political disagreements about the continuation of the reform process in the euro area’s crisis-stricken countries, as well as an escalation of the conflict between Russia and Ukraine, could lead to disruptions in the financial markets. A sudden or stronger-than-expected increase in U.S. interest rates could lead to capital outflows from emerging economies and a massive correction of asset prices in industrialized countries. For the euro area in particular, there is still the risk of sliding into deflation, which would complicate the reduction of debt and thus have a dampening effect on demand.

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