Economic Outlook

German economy approaches boom period

Kiel Institute Economic Outlook Germany, Nr. 35 (2017 | Q3)

The pronounced expansion of the German economy accelerates further. Compared to our summer forecast, we adjust our forecast for the current and the next year upwards, and we expect gross domestic product to grow by 2 percent in the current year and 2.2 percent in the next year (summer forecast: 1.7 percent and 2.0 percent). Also in the year 2019, gross domestic product is expected to grow markedly by 2.1 percent. In the forecasting period, gross domestic product will expand faster than potential output growth, a measure of the long-term sustainable economic development. With capacity utilization already above normal levels, the German economy is approaching a boom period. The expansion is becoming increasingly broad-based: alongside consumption, exports and investment are gaining weight as important pillars of the expansion. Exports are set to grow at stronger rates, stimulated by the upswing of the global economy. Business investment will further gain momentum due to the favorable business outlook and growing needs to expand capacity. Construction activity also continues to increase at high rates due to very favorable financing conditions. Private consumption, however, is likely to slow down somewhat compared to previous years, as markedly higher inflation will dampen the purchasing power of households. With production capacities being highly utilized, domestic price pressure is set to increase, such that we expect inflation to come in at to 2 percent by 2019. Employment continues to rise, even though a gradual slowdown of labor-supply will set a limit on the extent of employment gains. Wages are expected to grow more dynamically. Germany’s general budget surplus is set to increase further. However, the surplus is a temporary phenomenon owing to high cyclical dynamics and low interest rates, such that the scope for expansionary fiscal policies remains limited.