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Joint Economic Forecast Autumn 2015: German economy stable but needs effective policies to nurture growth

Press Release of October 8, 2015

The German economy is experiencing a moderate upturn. Gross domestic product will increase by 1.8 percent in 2015 and in 2016 respectively. Growth will be driven by private consumption. In view of the world economy’s modest growth, exports are only expected to rise slightly, especially as the stimulating effect of the euro’s depreciation gradually starts to fade. There will be a more rapid expansion in employment, although unemployment is expected to grow slightly in 2016 as the large number of refugees currently arriving in Germany gradually impacts the labour market. Public budgets are expected to post a surplus of 13 billion euros in 2016. This will be significantly lower than the surplus of around 23 billion euros forecast for 2015, mainly due to additional expenditure related to tackling the influx of refugees.

Members of the Joint Economic Forecast project group:

German Institute for Economic Research (DIW Berlin)
Press contact: Tel.: +49(030) 89789 252, Email:  
in co-operation with:
Österreichisches Institut für Wirtschaftsforschung

Leibniz-Institut für Wirtschaftsforschung Halle
Press contact: Tel.: +49(0345) 7753 720, Email:  
in co-operation with:
Kiel Economics

Ifo Institute – Leibniz Institute for Economic Research at the University of Munich
Press contact: Tel.: +49(089) 9224 1218, Email: 
in co-operation with:
KOF Konjunkturforschungsstelle der ETH Zürich

Rheinisch-Westfälisches Institut für Wirtschaftsforschung
Press contact: Tel.: +49(0201) 81 49 244, Email: 
in co-operation with:
Institute for Advanced Studies, Vienna

As in the first half of the year, world production is only expected to grow at a moderate pace in autumn 2015. The upswing forecast in the spring failed to materialize. The differences that started to emerge between global regions in 2014 have recently grown more pronounced. The economy is very robust in most developed economies. In a number of emerging economies, by contrast, the economic situation deteriorated once again. More specifically, there are signs of problems intensifying in China, where structural change is burdening key economic sectors like construction, manufacturing and international trade. Weak Chinese demand for imports caused a dip in world trade in the first six months of the year and curbed the economies of China’s Eastern Asian neighbours. Many of the emerging economies dependent on commodities have also been negatively impacted by the sharp decline in the price of oil and key industrial raw materials since mid-2014.

Turbulence in the international financial markets and a renewed downturn in the price of energy and commodities over the summer have led to a further deterioration in the framework conditions for many emerging economies. Unrest in the financial markets started in China, where a stockmarket bubble burst and signs that the economy was weakening started to multiply. The drop in energy and commodity prices probably resulted from both a clouding over of the outlook in terms of future demand and an upturn in supply. On balance, the fall in commodity prices is expected to increase aggregate demand worldwide, because the internal absorption of commodity-importing countries is generally far greater than that of commodity exporters, which will suffer losses in real income.

Lower energy and commodity prices have significantly curbed the global price dynamic since autumn 2014. In several emerging economies – like India and China – central banks eased their monetary policy. In Brazil, by contrast, monetary policy reins were tightened markedly to offset pressure on its domestic currency to depreciate. In the major advanced economies monetary policy remains very expansive. Nevertheless, the expansionary stance in these countries has diverged this year. The US central bank has not increased the volume of bonds that it holds since December 2014 and has signalled base rate increases; the institutes expect a first increase to be implemented in the final quarter of 2015. Interest rate increases are also expected in Britain during the forecasting period. The European Central Bank and the Bank of Japan, by contrast, have massively expanded their bond buying programmes against a backdrop of far more moderate economic activity and excessively low inflation. Differences in monetary policy orientation appeared to be priced into currency exchange rates back in spring. The depreciation of the yen and the euro has certainly ground to a halt since then.

Fiscal policy is expected to be neutral in most advanced economies in 2015 and 2016. The fiscal policy stance was relaxed in many cases thanks to the sharp drop in government bond rates, which eased the burden on government budgets. Fiscal policy in emerging economies will diverge more strongly in the forecasting period. Policy is expected to be more expansive in China, for example, where government investment programmes will support economic activity. It will be restrictive in Brazil, by contrast, where yields on government bonds recently rose markedly in view of poorer public finances.

Hardly any changes are expected in the moderate pace of world economic growth over the forecasting period. In advanced economies the upturn in production will be slightly higher than its long-term rate overall. The significant exchange rate adjustments seen since summer 2014 will continue to influence economic activity for a while. The appreciation of the dollar is expected to further curb US exports, while the Eurozone and Japan stand to benefit from depreciation of the euro and the yen respectively. The US economy will nevertheless remain stronger that of the Eurozone and Japan in the forecasting period. Economic developments in many parts of the Eurozone will remain constrained by high debt levels. Financing conditions, however, have improved, fiscal policy is no longer a constraining factor and real income is rising. The recovery is expected to continue as a result.

Growth in emerging economies will remain weak and is hardly expected to gain any impetus over the forecasting period, although Brazil and Russia will gradually pull out of recession. In China, however, economic growth is expected to continue to slow down. The unfavourable growth outlook, as well as the expected gradual increase in interest rates in the USA, will lead to a drop in foreign capital inflows and a deterioration of financing conditions in some emerging economies.

All in all, world production will increase by 2.6 percent this year and 2.9 percent next year. World trade is only expected to grow by 1.2 percent in 2015, which is largely due to the significant drop in trade in the first two quarters of the year. World trade will grow at a slightly higher rate of 3.4 percent in 2016, but this increase is small compared to the average rates seen over the last 20 years.

The worldwide fall in share prices and growing uncertainty on the part of financial market players over future market developments constitute potential risks. Above all, there are fears of a marked downturn in China. There is also the danger that the fall in commodity prices, combined with the expected increase in US base rates, will lead to a major capital exodus from commodity exporting emerging economies. In an extreme case scenario, massive capital outflows could create turbulence in their financial markets or even currency crises.

The German economy is experiencing a modest upturn. In the first half of the year gross domestic product grew at rates that roughly correspond to the growth rate of potential output. Private consumption is driving growth. Consumption, in turn, was boosted by a marked upturn in employment and rising real wages, as well as purchasing power gains resulting from lower oil prices. Overall investment activity, by contrast, increased moderately. Regardless of the moderate pace of world economic growth, exports rose sharply. This was largely due to the recovery in the Eurozone and the depreciation of the euro.

Growth in the third quarter of 2015 continued at around the same pace seen during the first half of the year. Although production levels in manufacturing increased only moderately, this was more than compensated for by production in the services sector, where retailing turnover increased markedly and service providers gave very good assessments of their current business situation. The sharp upturn in employment in July and August, as well as assessments of the current business situation in industry also point to a slight acceleration in economic output. All in all, the institutes expect a 0.4 percent increase in gross domestic product in the third quarter.

Later in the forecasting period the upturn will mainly be driven by expenditure on private consumption. Although the boosting impact of lower oil prices on real income is gradually starting to fade, the latter continues to benefit from rising employment, collective wage settlements that are clearly above inflation, a falling tax burden and rising transfers. Such transfers are also growing due to influx of refugees, which is pushing up government consumption expenditure.

With favourable financing conditions continuing to prevail, capital investment will accelerate slightly. Investments in construction will pick up; with residential construction developing particularly strongly and a marked upturn in public investment. Equipment investment will also recover, although the pace of growth is nevertheless expected to remain far lower than in previous upturns. Key factors here are currently normal capacity utilisation rates and thus no change is expected during the forecasting period. Exports will be influenced by two opposing influences: the recovery in the rest of the Eurozone on the one hand, and moderate growth rates in emerging economies, especially in China, on the other. Against this background, growth in exports is only expected to be moderate, especially given that the stimulating impact of the euro depreciation will start to fade. The increase in imports is expected to be modest too, mainly due to lacklustre equipment sales, which are characterised by a particularly high import component. Overall, imports will probably grow slightly more than exports. After contributing 0.4 percent to the increase in economic output in 2015, foreign trade is therefore expected to make a lower contribution of 0.1 percentage points in 2016.

On the whole, gross domestic product will to rise at around the same rate as potential output. The institutes forecast growth of 1.8 percent for 2015 and 2016 respectively. The production gap is therefore expected to close as of 2015. The 68 percent projection interval for 2015 will range from 1.6 percent to 2.0 percent. The 0.3 percent to 3.3 percent range forecast for 2016 is considerably wider.

In view of the upward tendency in production, the working population will grow by 0.6 percent or 256,000 persons in 2016, following a similar sized increase this year. Additional workers are still largely being recruited from the “hidden reserves” or the immigrant pool. The decline in unemployment, by contrast, has ground to a halt. Unemployment is expected to rise slightly over the forecasting period as refugees increasingly become available in the labour market. The unemployment rate will climb a little from 6.4 percent this year to 6.5 percent in 2016.

Core inflation, which was recently 1.2 percent, will rise only slightly. Capacity utilisation rates are expected to remain unchanged on the one hand, and import prices are not expected to get a boost from the world economy either. Nevertheless, the curbing impact of lower commodity prices on inflation is gradually starting to fade. Against this background, the institutes expect an inflation rate of 1.1 percent for 2016, after 0.3 percent this year.

Public budgets posted a surplus of around 23 billion euros in 2015, which is far higher than last year‘s figure. Moreover, special factors reduced the surplus last year and boosted it this year. The surplus in 2016 is expected to be far lower at 13 billion euros, partly due to slightly more expansive fiscal policy on the one hand, and to additional expenditure related to the immigration of refugees on the other.

Germany is currently in the foreground of the political debate over how to manage the migration of refugees. Like the European debt and confidence crisis, the current immigration crisis highlights that on a European level the debate focuses on the national distribution of the burden rather than on a pragmatic solution to the problem. The current concentration of refugees in a handful of EU member states is not sustainable in the long term. That is why European standards for granting asylum and benefits for asylum-seekers are required. In the long term, it is worth considering whether responsibility for asylum procedures should be transferred to a European instance.

The distinction between a reaction to refugee flows and a long-term immigration policy primarily oriented towards the economic interests of the target country is becoming blurred in the public debate. On-the-run migration is no substitution for a sensible immigration policy, but it nevertheless offers opportunities for target countries. Integration into the German labour market is the most important lever for capitalising on these opportunities; and is also in the interests of immigrants. However, education should not only be recognized as a priority for asylum seekers. Modern economies tend to grow less from investment in bricks and mortar and more from investment in brainpower; and policies are needed that nurture this growth potential.