KfW Business Cycle Compass Germany

Growth momentum will peak in 2018 and dip moderately in 2019

• KfW Research confirms growth forecast of 2.5% for this year, expects rate to drop to 1.9% next year
• Consumption, investment and exports are drivers of growth
• Tighter labour market and interest rate reversal will slow growth in 2019

In the final quarter of 2017 the German economy continued to grow at a fast pace despite an unusually high number of holidays and bridging days. It is set to carry this momentum over into the year 2018. KfW Research therefore maintains its economic forecast of 2.5% growth for this year, after 2.2% in 2017 (all rates not adjusted for calendar variations). The growth momentum should thus reach its peak this year before slowing moderately in the year 2019, for which KfW Research expects robust GDP growth of 1.9%. The lower rate will likely be driven by increasingly higher capacity utilisation levels as a result of the long duration of the upturn, particularly on the labour market, and the interest rate reversal.

The current strength of the German economy not only reflects historically high business confidence levels; it is also demonstrated by hard data such as incoming orders in the manufacturing sector. Industrial output is showing signs of significant expansion. Continuing workforce growth (+1.5% in 2017 on the previous year) and rising real wages (+0.8% in 2017 on the previous year) are benefiting consumption. This trend is showing no signs of abating any time soon. Given the continuing high need for housing in attractive conurbations, the prospects for residential construction also remain positive. At the same time, corporate investment remains on a growth path on the back of strong industrial capacity utilisation and robust increases in demand from international markets. The recovery of the global economy should provide impetus for German export growth irrespective of the recent euro appreciation.

Growth is likely to decrease slightly in 2019 but continue at a solid rate of 1.9%. The global interest rate reversal that has begun, combined with a growing scarcity of skilled labour, is expected to slow growth momentum slightly as many businesses are likely to bring planned investments forward to 2018 in anticipation of rising borrowing costs. A significant slowdown in growth in 2019 is unlikely given the next German government’s fiscal policy. The new grand coalition is planning additional expenditure and revenue shortfalls of just under EUR 46 billion for the period between 2018 and 2021 which, spread out across individual years, represents an average 0.3% of GDP.

KfW Research estimates that the risks which have existed for the German economy for some time already – the bumpy Brexit negotiations and the protectionist tendencies of US policy – have been compounded by increased volatility in the capital markets and possible downward pressure from an unexpectedly strong euro. It regards the latter as a plausible scenario if the US measures are overestimated and the tax reform and additional spending increase the public deficit but not growth.

“The German economy continues to present itself in robust shape. Its growth since 2014 has been above the long-term trend rate. The strong upswing is continuing this year and next year as well”, said Dr Jörg Zeuner, Chief Economist of KfW Group. He added that there was no likelihood of the economy dangerously overheating any time soon. “For one thing, the initial capacity underutilisation resulting from the global financial crisis in 2009 and the euro crisis of 2012/13 was enormous, and for another, prices and wages in particular would have to increase much more drastically than is generally expected.”

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