Economic Outlook

German economy at full steam

Kiel Institute Economic Outlook Germany, Nr. 38 (2017 | Q4)

The German economy is running at full steam. Economic activity has further accelerated in the current year and leading indicators suggest that the rapid pace of expansion will continue in the coming year. We expect gross domestic product (GDP) to grow by 2.3 percent in 2017 (calendar-adjusted: 2.6 percent) and by 2.5 percent in 2018 (calendar-adjusted: 2.6 percent); this is an upward revision by 0.3 percentage points in both years compared to our forecast in September. With capacity utilization already well above normal levels, the German economy is, thus, approaching a boom period. Tensions are becoming more and more apparent on the labor market. As a result, higher wages will boost the income gains of private households while employment growth is likely to slow down a bit. The inflation rate is expected to rise and to reach 2 percent in 2019. The expansion of the German economy is broad-based. Private consumption will continue to expand at a relatively high rate due to high income growth. The boom in the construction sector is ongoing, although capacity constraints will lead to a considerable increase in construction prices. Exports are likely to be further stimulated by the strong upswing in the global economy. Moreover, business investment is becoming an additional pillar of the expansion as firms increasingly move away from their previously observed wait-and-see approach, in view of high capacity utilization and favorable business prospects. Cyclical factors will lead to a high budget surplus of about 1.5 percent relative to GDP. The scope for additional expenditures is very limited, however, since the increase in revenues is only a temporary phenomenon and demographic developments will cause considerable budgetary burdens in the future.