Joint Economic Forecast: Significant Cooling of the Economy – Political Risks High

“The long-term upswing of the German economy has come to an end,” says Oliver Holtemöller, head of the Department of Macroeco­nomics and Vice President of the Halle Institute for Economic Research (IWH), which coordinated this spring’s report. The report concludes that political risks have further clouded the global econ­omic environment. However, the economic slump in the second half of 2018 is due primarily to obstacles to production in industry. “We still consider the chance of a pronounced recession to be slight,” Holtemöller adds. The forecast was completed as of March 29, 2019, when it still seemed that a hard Brexit would be avoided. This has now become less likely, but is still possible. However, if a no-deal Brexit occurs, economic growth this year and the next is likely to be significantly lower than indicated in this forecast.

Employment growth is expected to lose momentum, but the number of people in employment will rise from 45.3 million this year to 45.5 million next year. Over the same period, the number of registered unemployed people will de­cline from 2.2 million to 2.1 million. This will bring the unemployment rate down from 4.8 percent to 4.6 percent. Consumer price inflation is projected to rise from an average of 1.5 percent this year to 1.8 percent in 2020. Domestic inflation will in­crease. The institutes expect the government to see significant fiscal surpluses over the entire forecast period, although they will shrink considerably: while last year’s surplus reached a record high of 58 billion euros, this year’s is likely to be down to 41.8 billion euros and next year’s, 35.6 billion euros.

In view of the economic cooldown, fiscal policy should let the automatic stabi­lisers do their job. It should not seek to consciously save for the sake of Ger­many’s “black zero”; after all, both the German debt brake and the European fiscal policy framework explicitly permit cyclical deficits.

The risks for the German and the global economy have grown since autumn 2018. At the international level, there are threats posed by the trade dispute between the US and China and by the still unresolved Brexit process. At the national level, the economic situation is weighed down by supply bottlenecks, a shortage of skilled workers, and difficulties in the automotive industry.

The Joint Economic Forecast was prepared by DIW (Berlin), the ifo Institute (Munich), IfW (Kiel), IWH (Halle), and RWI (Essen).

About the Joint Economic Forecast

The Joint Economic Forecast is published twice a year on behalf of the Ger­man Federal Ministry for Economic Affairs and Energy. The following institutes participated in the spring 2019 report:

  • German Institute for Economic Research (DIW Berlin)
  • ifo Institute – Leibniz Institute for Economic Research at the University of Munich in cooperation with the KOF Swiss Economic Institute at ETH Zurich
  • Kiel Institute for the World Economy (IfW Kiel)
  • Halle Institute for Economic Research (IWH) – Member of the Leibniz Association
  • RWI – Leibniz Institute for Economic Research in cooperation with the Institute for Advanced Studies Vienna