German Economy Overcomes Recent Stagnancy—Domestic Demand Drives Production above Normal Capacity Levels
Press Release March 15, 2012
Following a slight reduction of economic activity of 0.7 percent at the end of last year, the German economy is expected to get back on a more and more robust growth track during the course of this year. Starting in October, business expectations have improved four months in a row. In January, industrial production has picked up again while order inflows so far remained sluggish. Due to the very moderate first quarter—GDP is expected to expand by no more than 0.6 percent—this year’s growth performance of 0.7 percent (working-day adjusted: 0.9 percent) will not only stay drastically below last year’s figure of 3 percent but also below the country’s potential growth rate that is estimated at 1 ¼ percent. The expansionary forces are expected to gain momentum until the end of the forecasting horizon. Next year’s growth rate will increase to 1.9 percent pushing the economy above normal capacity utilization levels again.
The recent downswing is mainly due to a weaker international environment. In particular, the sovereign debt crises in some Euro area countries as well as more moderate growth in some emerging markets negatively affected business opportunities for German exporters. As the shape of the global economy from a German perspective is expected to continuously improve during the forecasting period, export demand will recover from the currently depressed level. Nevertheless, in both years imports will increase more strongly than exports (3.5 percent vs. 2.2 percent in 2012 and 5.7 percent vs. 4.8 percent in 2013).
Domestic demand will be the driving force of German business cycle dynamics this year and next year. Investment spending—fueled by historically low real interest rates following from the ECB’s extremely expansionary monetary stance—will expand strongly. Overall gross fixed capital formation is expected to grow by 2.9 percent in 2012 accelerating to 6.2 percent next year. While spending for machinery and equipment shows a typical cyclic upswing pattern responding to varying capacity utilization rates, residential construction is particularly stimulated by low mortgage rates. Upcoming fears of financial instability also play a role. There is some evidence of higher housing price inflation, but it is too early to identify clear signs of bubbles in the German housing markets. Private consumption benefits from increasing real personal income and a very well performing labor market. Assuming the private saving rate to stay at its current level near 11 percent private consumption spending is expected to increase by 0.7 percent this year and by 1.1 percent in 2013.
The success story of the German labor market continues. Employment is expected to increase by another 493 000 in 2012 and 437 000 in 2013. As economically inactive persons will enter the labor market the extra employment is only partly reflected in reduced unemployment figures. The latter will shrink by roughly 200 000 in both years bringing total unemployment down to 2.8 million (2012) and 2.6 million (2013). This corresponds to an official unemployment rate of 6.6 percent and 6.1 percent respectively (according to the ILO concept these rates will be as low as 4.8 percent and 4 percent). Effective hourly wage rates are expected to increase by more than 3 percent – the highest wage increases since the mid-1990s.
As a flip side of the overall recovery, inflation rates are going to increase even further to 2.5 percent this year and 2.4 percent next year. While this year’s increase in consumer prices partly reflects the recent rise in energy costs, next year’s inflation will be almost entirely fueled domestically. With labor productivity gaining momentum only gradually, unit labor costs are expected to increase by 3.4 percent in 2012 and 2.4 in 2013.
Fiscal consolidation will continue this year bringing the total budget deficit down to 0.7 percent in relation to GDP (coming from 1 percent in the previous year). However, further reductions can hardly be seen for next year. While this is in line with the upper limits of the transition path to fulfill the future constitutional debt break, it is less ambitious than it could be given the favorable overall economic outlook.
Key Economic Data for Germany, 2010–2013
|Real GDP (change over previous year in percent)||3.7||3.0||0.7||1.9|
|Employment (incl. self-employed, 1 000 persons)||40 553||41 100||41 593||42 030|
|Unemployment (1 000 persons)||3 238||2 976||2 775||2 560|
|Consumer prices(change over previous year in percent)||1.1||2.3||2.5||2.3|
|Public sector balance in percent of GDP||–4.3||–1.0||–0.7||–0.6|
|Public debt in percent of GDP||83.2||80.9||81.6||79.2|
|Shaded area: IfW forecast.|
Summary of the Kiel Discussion Papers 504/505 by Jens Boysen-Hogrefe, Dominik Groll, Nils Jannsen, Stefan Kooths, Björn van Roye, and Joachim Scheide „Deutschland: Konjunkturflaute wird überwunden“.