German GDP increasing

GiNN-BerlinKontor.—German GDP is expected to increase by 1.8 percent this year and 2.0 percent next year. In 2015, economic activity is mainly driven by consumer spending (+ 2.7 percent, a two-decade record high number) and housing constructions (+ 3.8 percent), complemented by corporate investment spending as the second growth pillar next year (+ 6.6 percent in 2016, after 2.6 percent this year).

In 2015, consumer spending is boosted by strong wage earnings, expanded social transfer programs, and purchasing power gains from low energy prices, in particular in the first half of the year. Foreign trade flows will gain momentum, but net exports remain neutral in terms of stimulus effects during the forecasting period leaving the current account surplus at a level of about 250 billion Euro in both years (after 219 billion Euro last year).

The economy is operating at normal capacity utilization rates this year (closed output gap), but will dive into moderate overutilization territory next year. Given the weak potential growth rate of 1 ¼ percent the German economy is prone to overheating as the ultra-low interest rates are likely to strongly stimulate the economy in the upcoming years. In line with increasing production numbers, the labor market will continue to create more jobs (+ 340 000 in each year). Unemployment rates, already at record-low numbers since reunification and as low as nowhere else in the European Union (according to the ILO concept), will come down even more: 5.0 percent (2014), 4.7 percent (2015), 4.4 percent (2016).

Consumer price inflation remains subdued in 2015 due to the recent oil price slump. However, domestic upward price pressure remains unaffected. The GDP-deflator is expected to increase by 2.1 percent in both years after 1.7 percent in 2014. With base effects fading out, consumer prices will start to increase during the current and next year. Despite the high momentum in GDP growth public finances will not show higher fiscal surpluses. The fiscal balance remains very moderate in both years (0.3 percent in relation to GDP) not showing ambitious consolidation endeavors despite a very favorable macroeconomic environment.

Euro area GDP growth accelerated slightly in the fourth quarter of 2014. Our assessment of the business cycle suggests that the recovery continues, but the speed of the recovery will only be moderate. Overall, we expect a GDP growth of 1.3 percent in 2015. In 2016, the recovery is forecast to gain some momentum so that the increase in output is 1.7 percent. We expect GDP growth to be more and more driven by domestic factors.

Private consumption expenditures will benefit from low energy prices and the stabilization of labor market conditions as well as a slow pick-up of wages. After an average inflation rate of 0.4 percent in 2014, we project that the overall price level stagnates in 2015. In the year 2016, prices will increase by 1.1 percent.

The rise in employment has accelerated over the past year. This recovery will continue during the forecasting period. We expect the unemployment rate to drop to 11.1 percent on average in 2015. In 2016, unemployment will decline further to 10.5 percent. In 2014, the consolidation of public finances came to an end. The improvement of the budget balance in 2015 and 2016 will be solely due to the improved business cycle conditions and lower interest payments on outstanding debt. The deficit is projected to shrink from 2.5 percent in 2014 to 2.3 percent in 2015 and to 2.1 percent in 2016. (source:ifw-kiel.de)

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