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Kiel Institute Economic Forecast: Economy Cools Down, but No Crisis yet in Sight

13.03.2019

The flagging last half-year is still having an effect. The business cycle researchers at the Kiel Institute have revised their forecast for the growth rate of German GDP in 2019 from 1.8 percent to 1.0 percent. For 2020, they continue to expect growth of 1.8 percent. However, despite the economic slowdown, overall capacity utilization remains above average. The surpluses of public budgets are likely to fall significantly.

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In their current economic forecast, researchers at the Kiel Institute for the World Economy (IfW Kiel) anticipate catch-up effects in the first half of the year following last year's loss of production due to the low levels of water and the new WLTP standard for the car industry. Nevertheless, they have significantly revised their forecast for GDP growth by 0.8 percentage points to 1.0 percent for the full year.
 
In addition to lacking tail winds due to the subdued momentum during the second half of last year (bringing the statistical overhang down to zero) political uncertainties, trade conflicts and the lack of clarity about China's economic situation are weighing on the outlook.
 
"The German economy is showing clear signs of slowing, which will also have an impact on public budgets. But at present there is nothing to suggest an abrupt decline in the economy or even a recession. The employment situation will therefore remain steady," said Gabriel Felbermayr, President of the Kiel Institute for the World Economy (IfW Kiel).

For 2020, the experts expect a growth rate of 1.8 percent with the unusual high number of working days accounting for 0.4 percentage points. “The mere set of figures portrays the economic dynamics worse this year and better next year than they actually are," said Stefan Kooths, Head of Forecasting Center at the Kiel Institute. "The German economy is cooling down, but it is not yet freezing. The over-utilization of capacities is receding, but as things stand at present, normal utilization levels will not be undercut next year either."
 
Exports are increasing only moderately, even if the growth rate of 2.8 percent exceeds the weak figure of the previous year (+ 2 percent). In line with the weaker economy, investment momentum should slow somewhat, but not collapse. Although the increase in employment is continuing, it is slowing noticeably. The number of employees will rise by 450,000 this year and 330,000 next year (following an increase of 570,000 in 2018). The unemployment rate is expected to fall further to 4.8 percent (2019) and 4.6 percent (2020).

Consumer Spending has Boosting Effect, Recession does not Loom

Private and public consumer spending in particular is stimulating the economy. This is due to stronger wage growth as well as lowered taxes and encreased government benefits. The disposable incomes of private households continue to rise strongly by almost 3.5 percent in both forecast years. Further fiscal stimulus results from measures such as the implementation of the Digital Pact, purchases for defense or investments in broadband networks. Construction activity remains very strong showing annual growth rates of 2.8 percent (2019) and 3.2 percent (2020) with construction prices likely to continue to rise sharply at rates near 5 percent.

Government surpluses are declining as a result of extensive fiscal packages. After the record surplus of 58 billion euros in 2018, they are likely to melt down to 41 this year and 26 billion euros next year. The current account balance in relation to GDP will stay stable near 7 percent of GDP in the forecast period.

"The slowdown of the German economy is of no concern in terms of macroeconomic stability, as the over-utilization of capacities is expected to recede. A recession is not yet imminent; it is typically accompanied by an abrupt slump in corporate investment activity, which has not yet become apparent. After the protracted upswing, the downturn may now also be less spectacular," said Kooths. 

Euro Zone and Global Economy Slightly Subdued

The Kiel researchers also expect lower growth rates than before for the euro zone economy and the global economy. GDP in the euro zone is expected to grow by 1.2 percent in 2019, compared with 1.7 percent in the previous outlook. For 2020, experts continue to expect production growth to increase slightly by 1.5 percent. The unemployment rate will continue to decline and next year it should fall below the historical pre-crisis low. Consumer prices are likely to rise only moderately by 1.3 percent this year and by 1.5 percent next year, so that the European Central Bank is not expected to raise interest rates before 2020.

The pace of global economic expansion is expected to slow significantly compared with the previous two years, but experts do not foresee a collapse in view of an overall expansionary monetary and fiscal policy. For 2019 and 2020, researchers are revising their forecasts downwards by 0.1 percentage points and now expect global production to grow by 3.3 percent in both years (following an increase of 3.7 percent in 2018).

For further details please check out our Subject Dossier Economic Outlook 

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