Economic Outlook

German economy falters

Kiel Institute Economic Outlook Germany, Nr. 56 (2019 | Q2)

The German economy is facing strong headwinds. In recent months, economic momentum has continued to slow down and companies are much more pessimistic about the future. The high level of global economic policy uncertainty likely was an important contributing factor. Gross domestic product (GDP) even threatens to decline in the second quarter. We therefore lower our forecast for GDP growth to 0.6 percent in the current year (spring forecast: 1 percent) and 1.6 percent in the coming year (1.8 percent). In the second half of the year, aggregate production is expected to trend up again, albeit at only a moderate pace. One reason for this is that private consumption, after having taken a short break in the second quarter following the very high growth rate at the beginning of the year, is likely to grow noticeably again, in line with the continued strong increase in incomes. Exports, which have lately remained well behind the relatively robust expansion of the global economy, are likely to gradually regain their footing. Construction investment is set to retain its pronounced upward momentum, even though persisting capacity constraints will lead to further sharp rises in construction prices. However, due to the gloomy sales and earnings outlook, no more impetus can be expected from business investment. The slower economic development will also leave its mark on the labor market. Especially in the manufacturing sector, more and more companies are planning to reduce their workforce. In addition, it seems that even if companies still have vacancies to be filled, they continue to face difficulties in finding workers with adequate skills. Against this backdrop, government budget surpluses are set to decline markedly, as the slower pace of economic activity will weigh on revenue while, according to plans, spending will increase significantly.