Weighed down: German economy only experiences moderate growth, despite tailwind

• KfW Research expects a plus of 1.5% this year / outlook for 2016: 1.8%
• Mainstays are consumption and residential housing construction
• Additional impetus from low oil price and weaker euro
• Negative factors remain uncertainties in Europe and tensions with Russia

The German economy is benefiting from a tailwind, and will likely grow more strongly this year than previously expected: KfW Research made an upward adjustment to its economic outlook for 2015 to 1.5% (previous outlook: 1.0%, all figures not adjusted for calendar effects). In 2016, real growth is expected to accelerate to 1.8%.

"I am cautiously optimistic," summarises Dr Jörg Zeuner, Chief Economist at KfW. "Personal consumption and residential housing construction can be relied on to produce a tailwind. The economy is currently benefiting from additional impetus from the low oil price and favourable euro exchange rate. However, I do not anticipate GDP growth of 1.5% this year. There's just too much ballast." Besides the continuing tensions with Russia, a key negative factor is, despite some progress, the ongoing uncertain situation in the eurozone, which is negatively impacting companies' willingness to invest. "If these uncertainties were to recede more rapidly than expected, stronger economic growth would be on the cards."

The upwards adjustment for 2015 is partly for technical reasons. Due to the unexpectedly strong growth spurt at the end of 2014, the calculated upturn and its effects from last year are considerably greater than previously estimated (statistical overhang: 0.5 percentage points). The fall in the oil price and the weakening euro also justify more optimism. Both these new factors are bolstering up the existing impetus from gains in the labour market, decent wage increases, capital gains for property owners and low interest rates: cheap oil means that there is surplus cash for spending on other items and is driving up consumption even more, while the weak euro is further enhancing the competitiveness of German exporters.

Accordingly, the current business expectations of German companies again reflect greater confidence in the future, but are not euphoric. Corporate investments, which trailed below the zero mark at the end of 2014 for the third quarter in a row, are initially only likely to grow slightly. KfW Research expects – also on account of the weak starting level – a meagre plus of less than 1% for 2015 as a whole.

The final quarter of 2014 with its surprisingly strong performance (+0.7% quarter-on-quarter) will, for now, remain an exception. The impressive rebound following the stagnation of the previous half-year significantly overstates the power of the current economic recovery, and it is not likely that this trend will continue. For the forecast period, KfW Research expects moderate quarterly growth in the region of 0.2% to 0.5%.

The current KfW Economic Compass is available at

www.kfw.de/konjunkturkompass