Abstract: In the projection period, the German economy will grow at a considerably slower pace than in the previous years. After a three per cent increase in 2011, German GDP will rise by only one per cent in this year and by close to two per cent next year. It is primarily domestic demand that drives this expansion, while exports are not expected to pick up until the turn of the year. The weaker economy is likely to lead to a temporary reduction in employment. On annual average, however, the unemployment rate will remain just below seven per cent in this and the next year.
The economic crisis in the Euro Area has amounted to a stronger than expected drag on the German economy. While economic tensions seemed to ease at the beginning of the year, the crisis has regained momentum due to the political instability in Greece and the problems in the Spanish banking sector, which have now become more evident. The resulting uncertainty together with the ongoing austerity policies are a drag on domestic demand in the crisis countries and, as a consequence, on German exports. Growth will remain slow in those economies in the medium term, since the process of structural change underlying the current reduction in GDP will last for some years. Also, for the rest of the industrialised economies, the economic outlook remains gloomy. Persistent problems in the labour market and high levels of sovereign and private debt are likely to hamper economic development. Even the emerging markets have recently seen lower growth rates. However, more expansionary monetary and fiscal policies have been adopted there, which should stimulate the economy from the second half of this year.
As a consequence, the export industry’s contribution to economic growth in Germany is only moderate this year. Investment activity is expected to be restrained as well, with the construction sector being a notable exception due to favourable financing conditions. Employment is thus expected to decrease slightly, although it remains at high level. Nevertheless, private consumption continues to be the main source of growth, mostly based on high wage agreements and declining inflation rates. In the following year, exports and, as a result, investments are expected to pick up again. Thus, the unemployment rate will increase slightly to above seven percent until the end of this year. Thanks to stronger growth in the following year it is then expected to decline to about 6.5 per cent by the end of next year.
The consolidation of public budgets currently makes slower progress than in the previous year. On the one hand, government revenues are expected to rise considerably thanks to strong economic developments. On the other hand, government spending will increase strongly compared to last year’s increase. The reasons for this lie in noticeable wage increases in the public service, significant pension increases, as well as discretionary measures. The budget deficit will decrease to 0.4 per cent in 2012 and to 0.1 per cent in 2013. While Germany thus does well in comparison to other European countries, the currently favourable economic situation should be used to reduce the deficit more rapidly.
The complete publication in German by Ferdinand Fichtner, Simon Junker, Kerstin Bernoth, Franziska Bremus, Karl Brenke, Mareike Breuer, Christian Dreger,
Christoph Große Steffen, Hendrik Hagedorn, David Kunst, Katharina Pijnenburg, Kristina van Deuverden and Max Winkler in:
DIW Wochenbericht 26/2012 (PDF, 1.67 MB)