KfW Business Cycle Compass Germany: real growth is unspectacular, but reliable

• Growth forecast for 2016 revised downward slightly from +2.0% to +1.7%
• Turmoil in global financial markets has increased uncertainty
• Initial forecast for 2017: 1.8%
• Downward risks: lengthy debates in Europe and a stalling global economic recovery

KfW revises its gross domestic product (GDP) growth forecast for Germany for 2016 downward to 1.7% (initial forecast: +2.0%) in response to the recent increase in uncertainty caused by the intense global financial market turmoil. Price-adjusted GDP growth in 2017 is likely to be roughly in the same range, at 1.8%.

The main drivers of strong domestic demand are still effective and will sustain the economy this year and next. Both private consumption and residential construction are benefiting from a growing workforce, rising real incomes and persistently very low interest levels. In addition, immigration is creating a steadily rising need for affordable rental housing and causing public consumption expenditure to increase noticeably. The historically high public surplus will fall and stimulate the economy.

The external environment is also showing signs of continuing recovery. The general focus on the underperforming big emerging economies, such as China, Russia and Brazil, is diverting attention from the fact that many smaller countries are recovering much faster, so the global economy can be expected to grow slightly more strongly in 2016 than in 2015. The large economies should at least stabilise in 2017 so that the pace of global growth can accelerate further. Against this background, exports and corporate investment will pick up. Since import growth can also be expected to be relatively strong thanks to Germany’s healthy domestic economy, the arithmetic contribution of foreign trade to growth will still remain negligible.

Dr Jörg Zeuner, Chief Economist of KfW Group, on the new forecast: ‘Real growth of 1.7% in 2015 and 2016, as well as 1.8% in 2017, is not exactly spectacular. But the pace appears to be reliable and is well above the long-term trend growth of 1.3%.’ He also remarked that the strong variations in the numbers of working days mask the expected significant acceleration of the underlying economic momentum in this period.

KfW Research expects the current uncertainty to dissipate again and positive economic factors to prevail. However, lengthy debates in Europe over the influx of refugees, setbacks in the reforming countries or increasing nervousness at least in the lead-up to the referendum on the Brexit may undermine trust in the recovery just as much as unfavourable geo-economic developments.

In the light of these considerable risks, Zeuner emphasised: ‘I think it is right for Germany to be using its outstanding fiscal position – the highest public surplus since 1973 – to speed up the integration of migrants without neglecting public infrastructure. A reasonable European division of costs and burdens would be appropriate, but does not appear very realistic in my view.’ Zeuner also warned that the uncertainty in Europe, for instance with regard to the U.K.’s EU membership, dealing with Greece’s existing debt and the relationship between the member states, was already causing high economic costs, especially in the form of repeatedly postponed investment and innovation. At the same time, there was a high savings rate that was putting increasing pressure on returns. The consequence was negative interest rates on government bonds with maturities of up to 8 years. This, too, was unsettling people, who were worried about their retirement provisions. Unfortunately, the ECB’s current set of instruments was at its limits, he said, as long as the enterprises’ sales and earnings prospects were too low to justify more investment.

The current KfW Business Cycle Compass Germany is available for download at: www.kfw.de/konjunkturkompass.