Germany: Capacity Utilization back to Normal Levels – Expansionary Forces Become Weaker

Press Release March 10, 2011

After two years of high catching-up growth rates following the bottom of the trough in 2009 Q1 the Ger-man economy is now close to normal levels of capacity utilization. We expect the output gap to be closed during the course of this year and production to exceed the pre-crisis peak in the second quarter. Capacity utilization will continue to grow with decreasing momentum until the end of the forecast horizon widening the output gap to 0.6 percent next year.

Although the current record-high levels of business sentiment indicators may somewhat overdraw the growth perspectives of the German economy, the upward trend in production remains robust. Both de-mand-side and supply-side leading indicators suggest strong growth in the first half of 2011. Production shift effects in the construction sector resulting from bad weather conditions in the winter months will further strengthen economic activity in the first and second quarter followed by a slower growth pace in the second half of the year. We expect GDP to grow by 2.8 percent this year, after 3.6 percent last year.

Two thirds of this year’s increase in production is absorbed by domestic demand with private investment spending being the most important demand driver. Spending for machinery, equipment, and software will be particularly strong. Very low mortgage rates and a continuously improving labor market will stimulate housing constructions. By contrast, public investment spending will be significantly reduced now that the stabilizing impact of the stimulus packages fades out. In terms of growth rates, we expect the overall investment cycle to reach its peak this year. In terms of shares in GDP, the maximum will show up next year. Private consumption spending remains moderately strong during the whole forecast period. We expect the saving ratio of private consumers to decrease slightly towards pre-crisis levels, so the expected increase in real personal income of 0.8 percent per year will lead to higher consumption demand of about 1 percent in both years.

Net exports will increase this year and decrease next year bringing the growth contribution of external trade down from 0.9 percentage points this year to -0.3 percentage points in 2012. This swing is mainly due to lower production dynamics in many of Germany’s trading partners and a relatively stronger expansion of domestic demand.

With external and endogenous internal expansionary forces dampening in the course of the forecast period we expect the German economy to growth by 1.6 percent next year (1.8 percent when adjusted for working day-effects). While the speed of expansion slows down it is still above the estimated potential growth rate of 1.2 percent.

The upward trend in employment is intact but will become weaker during the next two years. The number of hours worked is already back to pre-crisis levels. Short-time working due to a lack of demand is no longer an issue in Germany. We expect the official number of unemployed persons to be slightly below 3 million in 2011 and 2.8 million in 2012. This corresponds to 7.1 and 6.7 percent of the labor force (after 7.6 percent last year). The improved bargaining position of workers will gradually drive effective wage rates upwards: the still moderate increase of 0.4 percent this year (coinciding with decreasing unit labor costs) is followed by 3.4 percent next year that push unit labor costs by 2.3 percent. As this process gains mo-mentum during the course of 2012 it does not yet fully show in Germany’s inflation figures (consumer prices are expected to increase by 2.2 percent in 2011 and 2.0 percent in 2012).

Key Economic Data for Germany, 2009–2012

Summary of the Kiel Discussion Paper 488/489 by Alfred Boss, Dominik Groll, Nils Jannsen, Stefan Kooths, Björn van Roye and Joachim Scheide „Deutsche Konjunktur: Produktion überschreitet die Normalauslastung – Expansion setzt sich verlangsamt fort“.

Contact: Prof. Dr. Joachim Scheide and Dr. Stefan Kooths