Economic Outlook

Expansion is set to continue

Kiel Institute Economic Outlook Germany, Nr. 26 (2016 | Q4)

The expansion in Germany is set to continue despite headwinds from abroad. We leave our forecast as of autumn unchanged and expect GDP to grow by 1.9 percent in 2016 and by 1.7 percent in 2017. The effects of the Brexit-vote on the German economy will be modest in this period. The long-run effects of the presidential election in the United States and the Italian referendum are difficult to gauge. In the short run the impact on the German economy will most likely be small. Against this backdrop, we expect exports to regain some momentum and to support the economic upswing in Germany. However, domestic drivers remain the dominant factors. Construction activity will grow with high rates as financing conditions remain very accommodative. Private consumption expenditures are fueled by high growth rates in private income due to the strong labor market and expanding public transfer payments. However, growth in private consumption is expected to decelerate somewhat over the next two years. With dampening effects of the oil price slump phasing out inflation accelerates and weighs on real disposable income of private households. In 2018, we expect consumer price inflation to be close to 2 percent, after 0.5 percent in the current year. Business investment will regain momentum as the weakness in the second and the third quarter reflected temporary factors, such as the uncertain international environment dampening investment activity of export-oriented firms in particular. Moreover, the general environment for business investment is still favorable with the business outlook being good and with capacity utilization above normal levels. General government budget balance will remain in positive territory close to 0.5 percent relative to GDP, with both expenditures and revenues increasing strongly over the entire forecast period. The labor market remains in good shape. By 2018, we expect employment to have increased to 44.5 million and the unemployment rate approaching 5.5 percent.