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Business Cycle Forecast of the Kiel Institute for the World Economy: German Economy Remains on Growth Track

“The German economy remains on a robust growth track,” resumes Stefan Kooths, Head of the Forecasting Center, the Kiel Institute’s latest Business Cycle Forecast. For the current year the Kiel Institute expects a 1.8 percent gross domestic product increase, next year the rate of expansion is likely to accelerate to 2.1 percent. The private consumption boom continues, albeit not quite at the same rapid pace as in the past quarters, since temporary stimulating factors, like real purchasing power increases thanks to the oil price decline, are gradually subsiding. Investment spending is gaining strength and is to become the key economic driver next year, also against an ongoing favorable monetary backdrop, especially the interest rates remaining extremely low in a historic comparison. Inflation is picking up again after a marked, interim dampening by the oil price decline and will probably reach just under 2 percent by the end of next year.

Solid Economic Growth Must Not Turn Into a Respite for Policymakers

Exports are performing well in spite of an ongoing, difficult international environment and are additionally being stimulated by euro depreciation. At the same time, imports are likely to accelerate substantially owing to the high economic momentum prevailing in Germany. Employment trends continue to point upwards, even if the introduction of the minimum wage has evidently left initial skid marks in its wake. Public-sector budgets continue to generate surpluses; this, however, is essentially a reflection of positive economic trends and not of any particular fiscal consolidation efforts. “On the whole, there is a danger of economic policymakers misguidedly perceiving the positive cyclical development as an occasion for a respite,” Kooths says. “This environment results in benign public finances trends that could wrongly be interpreted as being permanent in nature, leading to structural spending increases.”

World Economy Still With Only Moderate Growth

Following a weak start into 2015, the global economy is expected to pick up again in the course of this year. Average annual world output growth will nevertheless remain sluggish at 3.4 percent on a purchasing power parity weighted basis, before accelerating modestly to 3.8 percent next year. “The global improvement is driven by stronger growth in the advanced economies,” Kooths says. There the ultra-low interest rates and continued monetary expansion are expected to increasingly gain traction given that deleveraging in the private sector has gone a long way in a number of important economies. “Nevertheless, the stimulus effects of the extremely expansionary stance of monetary policy around the globe should not lead policy makers to ignore the massive risks that are associated with the largest monetary experiment in mankind’s history,” warns Kooths. In contrast to higher momentum in the advanced world, the researchers do not expect a significant acceleration of output growth for the emerging economies where structural impediments abound and lower commodity prices have reduced export revenues in many countries.

Complete Forecasts: German Economy | World Economy