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German Economy Falters

13.06.2019

The German economy is cooling significantly and the global political uncertainty is affecting the German economy. In their current economic outlook, the researchers of the Kiel Institute for the World Economy revise their forecast for growth in gross domestic product (GDP) for 2019 to 0.6 percent (previously 1.0 percent) and for 2020 to 1.6 percent (previously 1.8 percent). Unemployment is unlikely to fall any further and public budget surpluses will fall to 33 billion euros. Kiel Institute President Felbermayr calls for a corporate tax reform and the abolition of the solidarity surcharge.

The underlying trend in the economy has weakened significantly. The 0.4 percent increase in GDP in the first quarter of 2019 was mainly due to special factors, such as catch-up effects in the automotive industry following problems with the new WLTP test procedure. For the second quarter of 2019, there are even signs of a decline in GDP. Subsequently, however, overall economic production is likely to increase again, albeit only at a moderate pace. The comparatively high growth rate for the coming year is 0.4 percentage points attributable to a high number of working days.

"German politics can do little to change the global political uncertainty that is weighing on companies in Germany, but can indeed improve the location quality. It should therefore now be a matter of making the German economy more resilient, for example by reforming corporate taxes and completely abolishing the solidarity surcharge," said Kiel Institute President Gabriel Felbermayr.

Overall, the economic picture is uneven. While industrial capacity utilization is declining significantly—production in the industrial sectors is likely to shrink for the fourth time in a row in the current quarter—and the service sector is only showing moderate growth, the construction boom is continuing. With growth rates of 4.4 percent (2019) and 3.1 percent (2020), construction investments outperform all other domestic economic activities. Construction prices are likely to rise by around 5 percent in each case.

Private consumption is likely to pick up noticeably again thanks to a further strong rise in incomes at rates of 1.7 percent (2019) and 1.4 percent (2020). The very favorable financing conditions and the still quite robust global economy are also supporting German growth. Exports will gradually regain their footing, but at rates of 1.2 percent (2019) and 3.5 percent (2020) will only increase moderately.

Unemployment will hardly fall any further

Due to the shortage of labor, the downturn is only slowly affecting employment and the unemployment rate will initially fall slightly to 4.9 percent (2019) and 4.8 percent (2020). In the manufacturing sector in particular, however, more and more companies are planning to cut jobs. By the end of 2020, the overall increase in employment should have come to a standstill. The surpluses of public budgets are likely to fall to 48 billion euros (2019) and 32 billion euros (2020) respectively as a result of the lower economic momentum, not including a so-called “Grundrente.”

"The German economy is in a downturn, not a crash. Similar to the protracted upswing, the easing after the boom could now be milder than in previous cycles. Capacity utilization in industry is declining more slowly than usual, and corporate investment has not yet collapsed either. There is no reason for economic policy actionism. Without the tailwind from the boom years, the actual performance of Germany as a business location is now becoming clearer. A tax relief for companies would improve the quality of the location and fit into the economic landscape”, said Stefan Kooths, Head of the Kiel Institute Forecasting Center.

Global economy without momentum

For global production, the Kiel Institute researchers expect an increase of 3.2 percent in 2019, 0.1 percentage points less than previously. For 2020, they continue to expect an increase of 3.3 percent. "Although global production increased quite strongly at the beginning of the year, global uncertainty remains high and sentiment indicators continue to point downwards, with the result that a weaker rise in production is to be expected again in the coming months. A further intensification of the trade conflict between the United States and China or an expansion to trade relations with the European Union pose a significant downside risk for the global economy and also for Germany," said Kooths.

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