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Economic output in Germany will increase by 1.8 percent in 2015 and 1.9 percent in 2016

Press Release of September 18, 2015

The euro area continues to recover – emerging countries’ economies are faltering – public budget with surplus despite challenges posed by increasing number of refugees 

The German economy remains on track, even as things are getting rockier: The researchers at the German Institute for Economic Research (DIW Berlin) forecast a 1.8 percent increase in GDP for this year and a 1.9 percent increase for next year. In that instance, they are sticking to their forecast from June. However, they emphasize that the risks have not lessened. Quite the contrary: In the euro area, many countries are still struggling with high private and public debts, problems in the banking sector, and a high level of unemployment. Growth in China and other emerging countries is fragile. This applies all the more considering that in the course of the forthcoming U.S. turnaround in interest rates, increased capital could flow out of the emerging markets, which could additionally reduce their economic momentum.

IN A NUTSHELL

Marcel Fratzscher (President, DIW Berlin):

"Although the German economy is still doing well, some risks could be looming on the horizon. Germany’s growth is too one-sided – that it, it is based too much on consumer demand and not enough on investment. The risks for Germany and Europe are significant: The possibility of prolonged sluggish growth in Europe has become even greater. Many structural reforms – in Germany, as well – have yet to be implemented, major issues in the banking sector remain unresolved, and in many of the EU member states, private and public debt as well as unemployment are high. The impending turnaround in interest rates by the U.S. central bank is necessary, but could lead to increased volatility in the financial markets until they’ve gotten used to the new medicine."

Ferdinand Fichtner (Head of the Department of Forecasting and Economic Policy):

"The German economy is still on track, though it is currently navigating troubled waters. The emerging countries in particularly are experiencing difficulties: Brazil and Russia are doing especially poorly from an economic perspective. But China has also decelerated. Thus the momentum is coming more from the major industrialized countries such as the U.S. and Britain. All the same, the euro area is slowly getting back on its feet – but the crisis could take a turn for the worse again at any time."

Simon Junker (Deputy Head of the Department of Forecasting and Economic Policy and an expert on the German economy)

"Considering the not-so-rosy global economic situation, German foreign trade is doing surprisingly well. Exports are traditionally a pillar of growth, which will be supplemented by strong domestic demand even in the longer term. Private consumption in particular is thriving, primarily due to the good situation in the labor market, which is in turn reflected in a relatively strong rise in wages. The money that refugees receive in the form of social benefits will probably be used largely for consumption purposes, and will thus benefit the German economy."

Kristina van Deuverden (Research Associate, Department of Forecasting and Economic Policy, Financial Expert):

"The dramatically increasing number of refugees at the moment reflects a humanitarian emergency that Germany must help alleviate – regardless of the possible economic and financial impacts, which in any case have been difficult to quantify and are based on all kinds of assumptions. As well, despite the additional expenditure of public funds, both in this as well as in the coming year there will be a significant surplus."

Although the global economic environment could be better overall, German foreign trade is continuing to do well, although it is expected to contribute very little to growth in the course of the forecast horizon. However, this is not because of problems with exports, but because of the sharp rise in imports due to domestic demand. Domestic demand remains the pillar of the economy – not least because of private consumption, which continued to increase thanks to the good labor market situation and low price increases. The consumer demand of refugees coming into Germany will also have an impact. Although the expenditure of federal, state, and local authorities will rise due to the increasing number of refugees, public budgets will conclude both years with large surpluses.

The global economy: Some good, some bad

After an extremely weak start this year, the global economy experienced only very little growth in the second quarter. In the forecast period, however, the growth rates are likely to increase: In industrialized countries in particular, the once-again-low energy prices ensure that low inflation will continue. The labor market situation has improved in many places, and corporations are increasingly taking advantage of the low interest rates to invest – not least in the U.S., where consumer demand is high and the capacities are once again being utilized more and more. The emerging countries, on the other hand, are faltering: Russia and Brazil remain mired in recession and are not expected to make a recovery until next year. In China, growth is slowing, but no recession is expected: Although industrial production has recently been progressing weakly and China's stock market has slumped, the financial market turmoil will not have any significant negative impact on the economy, since only a very small proportion of China's population holds shares. Furthermore, the government would likely handle a stronger economic slowdown with expansionary measures.

The euro area: Things are looking up

The euro area economy continues to recover, primarily thanks to a favorable environment: The external value of the euro is weaker than it was a year ago, the price of oil is low, monetary policy is very expansionary, and the economies of major trading partners like the U.S. and the UK are growing strongly. Accordingly, foreign trade is supporting growth, and the gradually increasing employment levels are benefiting consumption. Investment was still low in the second quarter, but things are looking brighter for firms, which is why they are requesting more loans for investment purposes. Although issues such as unemployment and high public debt still exist in many countries and the political future of Greece remains uncertain in light of the new elections, the euro area economy is likely to grow by 1.5 percent this year and by 1.7 percent next year.

The German economy: Consumer demand continues to drive growth

Growth in Germany is still robust. The domestic economy in particular appears energetic: Wages are rising faster than prices are – inflation is expected to stand at 0.4 percent this year and at 1.4 percent next year. This is noticeably kick-starting consumption. Firms, however, remain cautious when it comes to investing more again. Despite the low interest rates and increasing capacity utilization, they are expanding their investment in equipment only modestly: While exports continue to do well despite the emerging countries’ faltering economies, they are outweighed by uncertainties about development in important markets, paramount among them China and Russia, as well as concerns about the future of the euro area.

Meanwhile, employment continues to rise, ensuring that the unemployment rate will drop once again this year, to 6.4 percent. It will remain at this level next year as well, despite the increasing number of immigrants. DIW Berlin assumes that around 50,000 people who have come or will come to Germany as refugees will be seeking employment this year; next year it could be around 120,000 people. This is assuming that about 800,000 people come to Germany over the course of this year in both 2015 and 2016 as refugees in this year and the next.

Public budgets with large surpluses

Public budgets are well equipped: Taxes are bubbling up vigorously; payroll tax is still noticeably increasing due to the good labor market situation, but income tax is also expanding and the vigorous development of consumer spending is causing the VAT to rise significantly. In addition, the good employment situation is ensuring an increase in social security contributions. For some time, however, a higher spending dynamic has been emerging: For example, social non-cash benefits and advance payments as well as social security benefits have been expanding as part of the service extensions; but the state is also taking hold of more funds for investment. In the remaining forecast period, the spending dynamic will increase again: That more and more refugees are coming to Germany is also reflected in the public budgets. The related expenditure is, however, difficult to quantify, and the assumptions and settlements are highly uncertain. Even more difficult to quantify is the expenditure facing the revenue: The asylum seekers are increasing consumer demand and thus the VAT revenues. Once they take up employment, they will also pay income taxes and social insurance contributions. In this forecast, DIW Berlin assumes that the gross expenditure for social services, housing, and care of asylum seekers, among other things, will amount to more than 9 billion EUR in 2016.

Despite the increased pressure on the public budgets, there will still be high surpluses: Aside from one-time revenues from the auctioning of mobile phone licenses, the surplus will amount to 18.5 billion EUR this year and nearly 20 billion EUR next year; in relation to nominal GDP, the fiscal balance stands in both years at 0.6 percent.

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