KfW Business Cycle Compass

• KfW Research reaffirms growth forecast of 1.8% for 2016 and 1.3% for 2017
• Consumption and residential construction remain the pillars of the economy
• Brexit and rising preferences for isolation and protectionism in the USA and possibly soon in core Europe increase global risks

In the final quarter of 2016, the German economy looks set for a convincing finish to close the year with GDP growth of 1.8%. KfW Research thus reaffirms its previous forecast of August. For the coming year KfW’s economists expect GDP growth of 1.3% (previous forecast: 1.3%). Only one third of the expected slowdown compared with 2016 will be due to weakening economic momentum. Around two thirds will be caused by variations in the number of working days.

As in 2016, the domestic economy will remain the mainstay of growth in 2017. Consumption remains on a solid path of growth, not least as a result of growing employment. However, as real wages will be rising at a lower rate than the gradually increasing consumer prices, consumption growth in 2017 will be slightly lower than in 2016. Residential construction is also expected to remain in same trend of continuing sound but slower growth. Interest rate increases on the back of the US elections can be expected to have another slightly dampening effect on construction activity.

Corporate investment will increase only moderately next year despite significant increases in capacity utilisation in industrial firms and favourable financing conditions. Uncertainty is high, particularly for exporters, which is probably the reason many enterprises have put their investment plans on the backburner for the time being. Since the US presidential election the spectre of a more protectionist global economy has been hanging over the export nation Germany like a sword of Damocles. Germany’s future relationship with the United Kingdom also continues to be completely unclear since the Brexit referendum. The US is the number one and the UK the third most important export market for Germany. Both countries together account for some 40% of German direct investment.

The balance of trade will likely make neither a positive nor a negative contribution to real growth in 2017. Exports should recover slightly, especially because important emerging economies such as Brazil and Russia will probably be able to come out of recession and a growth slump in China is not to be expected. At the same time, however, Germany’s imports will increase noticeably as a result of domestic demand, which is clearly set for continued growth.

Dr Jörg Zeuner, Chief Economist of KfW Group, summarised his expectations for Germany’s economic development as follows: “The economy is on a good course, but the outlook for 2017 resembles a voyage into an area of dense fog where the ship can easily drift off course”. Within a matter of months, the votes in the USA and the UK had catapulted protectionist aspirations to the top of the chart of global risks. “On the other side of the Atlantic, important and probably highly controversial economic policy decisions will be taken in early 2017. On this side of the Atlantic, an important referendum in Italy and the rerun of the presidential elections in Austria are scheduled already in early December. Parliamentary elections in France and the Netherlands, which may reflect a growing preference for isolation and protectionism in core Europe as well, will follow in 2017. Smouldering in the background are the tensions with Turkey and possible controversies over the handling of distressed banks, particularly in Italy. The outcome of all these political uncertainties is still very much up the air.”

The current KfW Business Cycle Compass is available at www.kfw.de/konjunkturkompass