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Economic Outlook of the Kiel Institute 2015 – 2017: Robust German economy in an uncertain international environment

Despite the turbulences in the emerging markets and especially in China, the latest Business Cycle Forecast of the Kiel Institute for the growth in Germany maintains unchanged. For the first time, the forecast lasts over three years until 2017. “The German economy defies the uncertain international environment”, says Stefan Kooths, Head of the Forecasting Center of the Kiel Institute.

German GDP is expected to increase by 1.8 percent (2015), 2.1 percent (2016), and 2.3 percent (2017). Economic activity is driven by consumer spending that will increase in the upcoming years by about 2 percent per year due to strong increases in real disposable income. However, with firms operating at increasing utilization rates and a very stimulating environment for construction activity also growth in investment is expected to gain momentum. Exports will grow at a robust pace with the euro area showing solid GDP growth numbers. However, since imports will grow even faster than exports net exports will only contribute to GDP growth in the current year but not in 2016 or 2017. Nevertheless, Germany will experience an increase of its current account surplus that is in 2015 mainly due to terms of trade gains caused by the strong decline in oil price. The Labor market is still in good shape even though job increases have lost some momentum with the introduction of the minimum wage at the beginning of the year. However, higher net migration will more and more contribute to increasing employment numbers. Due to strong increases in public revenues, we expect budget surpluses to persist in the next three years and gross public debt to decline to about 63 percent (relative to GDP) in 2017. Given that the output gap is by and large closed and that potential output is growing at about 1.4 percent per year our forecast implies that the German economy is poised to overheating in the upcoming years. This comes with increasing risks for the built up of asset price bubbles and, hence, for financial stability given that interest rates will stay extremely low for another couple of years.

Weakness in emerging markets and China weighs on global growth

The world economy is expanding at a more moderate pace with growth momentum continuing to shift from emerging to advanced economies. World GDP will increase by 3.3 per cent this year – even somewhat less than the already modest growth in the recent past. For 2016 and 2017 we expect growth to pick up, although moderately, with global production expanding by 3.7 per cent. Advanced economies will gradually gain momentum over the forecast horizon. The US economy will grow by 2.5 per cent this year and accelerate to 3 per cent in 2016 and 2017. “The Fed’s rate lift-off will be delayed. We now expect the FOMC to raise rates in December when – according to our forecast – the outlook for the world economy will have stabilized”, says Klaus-Jürgen Gern, expert for international business cycle analysis.

Emerging markets are set to overcome the current weak and partly even recessionary performance but growth will remain low by historical standards. In China, GDP growth is expected to slow down further over the coming years, from 6.6 percent in 2015 to 6.3 and 6.0 percent in 2016 and 2017, respectively. However, „the official national accounts data the forecast is based upon may underestimate the severity of the current slowdown. The risk of a “hard landing” of the Chinese economy has risen considerably, in our view“, says Gern. According to the analysis of the Kiel Institute, a “hard landing” of the Chinese economy would dampen global growth significantly: a 3 per cent reduction in Chinese growth would lower global GDP by 1 per cent, implying that the world economy would experience a “growth recession” (defined as global growth of less than 3 per cent). Excluding China, world production would shrink by 0.5 per cent with Asian economies affected most strongly.

Moderate recovery in the Euro Area prevails

Economic activity in the Euro Area is gradually gaining grip in 2015. Sentiment indicators suggest that the current - rather moderate - recovery will prevail over the second half of the year. The upswing is expected to broaden and to be increasingly driven by domestic forces. It is supported by favorable financing conditions and lower oil prices, combined with a relatively low external value of the euro. All in all, we expect GDP to expand at a rate of 1.5 percent in the current year. In the years 2016 and 2017, growth is forecast to rise to 1.7 percent and 2.0 percent, respectively. The situation on the labor markets is expected to improve further, with a gradual decline of the annual average unemployment rate to 9.9 percent in 2017. In the short term consumer price inflation may dip again towards zero as a result of reduced energy costs but is expected to rise markedly towards the end of the year. For 2016 and 2017, we expect annual inflation rates of 0.9 percent and 1.8 percent, respectively.

Complete Business Cycle Forecast