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• Negative special factors such as strikes, an influenza wave and a cold snap resulted in disappointing growth at the start of the year
• KfW Research revises economic forecast for 2018 downward to 2.1% (previous forecast: 2.5%), confirms forecast of 1.9% for 2019
• Cyclical risks continue to increase

Several negative special factors such as the warning strikes in the metal industry, a major influenza wave and the intense cold spell in February and March combined to spoil the start to the year 2018 for the German economy, leading to significantly slower first-quarter growth (0.3% on the previous quarter). These one-off effects have now dissipated, however, and real growth should rise noticeably again to 0.6% in the current quarter, but that will not pick up the slack from the unexpectedly weak start to the year. KfW Research therefore revises its economic forecast for 2018 downward to 2.1% (previous forecast: 2.5%).

Despite this downward revision the outlook remains positive. Enterprises, not least, are banking on continued growth, as illustrated by the renewed increase in corporate investment in the first quarter (1.0% to previous quarter) – the fifth consecutive rise. Private consumption (0.4%) at the start of the year appears more vivid than in the second half of 2017 – a development which is likely to continue due to steady employment and wages growth as well as a further significant increase in pension payouts this year. Assuming the global business cycle remains generally positive, exports should overcome the weak start to the year (-1.0%) just as quickly as public consumption (-0.5%), which has should pick up again after the government was successfully formed in mid-March. Private construction investment, which also expanded by a strong 1.9% despite adverse weather conditions at the start of the year, remained consistently reliable.

Germany's economy can be expected to grow at a moderately slower pace next year. KfW Research confirms its previous growth forecast of 1.9% for 2019. The slower growth rate will result primarily from the rising levels of capacity utilisation after the long upswing phase, especially on the labour market.

“Even if our picture of Germany's business cycle remains generally positive, downward risks are growing”, said Dr Jörg Zeuner, Chief Economist of KfW Group. “In addition to Brexit, which remains unresolved, a coalition government is emerging in Italy whose main parties campaigned on very expansionary fiscal projects and strong criticism of the EU and the euro. Many of these aspects are now part of the coalition agreement. Unless these plans are scaled back considerably in practice, new conflicts within Europe and noticeable interest rate responses in the Italian capital market would be scarcely preventable. Moreover, there is still no solution in sight to the trade conflicts of the US with the EU and China, quite the opposite: The US administration is escalating the conflict with its recently announced order to consider levying tariffs of up to 25% on car imports.The recent unilateral US withdrawal from the Iran nuclear deal has the potential to lead to a further increase in the price of oil while widening the transatlantic rift over trade issues even more. Germany's strong integration into international value chains, the great significance of the automotive sector and its high current account surplus make it particularly vulnerable should this situation lead to serious distortions in global trade relations”, said Zeuner.

The further development of the business cycle will crucially depend on the effect which these international uncertainties will have on businesses' willingness to invest. KfW Research expects it to continue its clearly positive trend in the light of lively demand, very high industrial capacity utilisation and favourable borrowing conditions. “But if enterprises clearly hit the brakes on investment as a result of the uncertain conditions, a significantly more negative economic development would have to be expected – including an end to the upswing”, said Zeuner.

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