KfW Business Cycle Compass Germany: Solid growth but many risks

• KfW Research revises its economic forecast for 2018 downward to 1.8% (previous forecast: 2.1%) and for 2019 to 1.6% (1.9%)
• Downturn in new orders and waning sentiment indicators point to more moderate quarterly growth ahead
• Global trade conflicts, the crisis in Turkey, Brexit and Italy’s fiscal policy pose considerable risks that may weaken the upturn even further

After a first quarter burdened by special factors, Germany’s economy grew by 0.5% between April and June, a rate that was below the vigorous rebound initially hoped for. New risks accumulated in early summer, eliminating the euphoria about a synchronous global economic recovery that prevailed until the end of 2017. With the decline in incoming orders and falling sentiment indicators, growth is not expected to pick up in the second half-year and average quarterly growth is likely to be 0.4%. And since the periodic revision of national accounts by the German Federal Statistical Office reduces Germany’s growth in purely arithmetic terms this year, KfW Research has lowered its growth forecast for 2018 to 1.8% (previous forecast: 2.1%). Of the downward revision, 0.2 percentage points are due to the new official data and 0.1 percentage points to the more sceptical outlook on the future.

In 2019, real growth is expected to drop to 1.6% (previous forecast: 1.9%) but continue above the long-term average since German unification (1.4%). Part of the moderately lower growth rate next year will likely be due to increasing capacity constraints in the wake of the long upswing phase, especially in the labour market. Investments in productivity enhancements that could act as a counterforce are being stifled by a host of stubborn risks. These include, above all, tensions in transatlantic trade relations which have diminished since the meeting between US president Trump and European Commission President Juncker in mid-July but are still on the table. Other cyclical risks emanate from the trade conflict between China and the US, crises in emerging countries such as Turkey, Brexit and a possible conflict between the EU and Italy. In addition, exports are expected to provide less impetus as the dynamic of the global economy and growth in the other large euro countries are also likely to weaken slightly.

“Germany’s growth remains solid, but the global risks are significant”, summarised Dr Jörg Zeuner, Chief Economist of KfW Group. “Although we have already reduced our forecast, if one of these risks should fully materialise, the growth rate may decline even more strongly. What is positive, however, is that growth today is no longer as dependent on exports as it was in the past decade.”

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