DIW Autumn Projection 2012

The German economy will lose some of its momentum in the second half of the year, but pick up some speed again next year. In year-on-year terms, German GDP is expected to increase by a mere 0.9 percent in 2012 and 1.6 percent in 2013. Growth is primarily driven by domestic demand. The weakening of the economy in the second half of this year will have limited impact on labor markets, the unemployment rate will only increase slightly from 6.8 percent in 2012 to 7.1 percent in 2013. Hence, disposable income will grow at solid rates and support consumption of private households.

Uncertainties surrounding the crisis in the euro area have slightly decreased after the ECB’s announcement to expand its stabilization activities on government bond markets. This should support economic developments in the euro area. However, growth will remain weak in the crisis countries in particular and in the euro area as a whole. In addition, global economic dynamics are weak. Persistently high rates of unemployment and high levels of sovereign and private debt continue to hamper economic development in many advanced economies. Growth in emerging economies will slow down compared to the high rates seen in previous years.

However, monetary and fiscal policy remain expansionary there. This should stimulate growth first in emerging economies and subsequently in advanced economies. Weakening global demand is a drag on growth in Germany in the second half of this year; as of next year, an acceleration of the economic development is expected. Wages will increase substantially both this year and next year; inflation will remain close to two per cent. Consequently, the purchasing power of households is increasing, allowing private consumption to be a major driver of growth. Investment will increasingly contribute to growth in the course of next year; with decreasing uncertainties due to financial crisis as well as improving demand prospects, the extremely favorable financing conditions will gain in importance for investors. Compared to domestic demand, foreign trade is expected to have a moderate influence on economic growth, since exports are losing momentum due to a weak global economy and imports are increasing due to solid domestic demand. Over the medium term, economic developments in Germany will continue to be shaped by favorable financing conditions, solid wage developments, and strong domestic demand; the German current account surplus relative to GDP is projected to decline substantially over the five-year horizon.

The general government’s budget is expected to show a surplus of 0.3 percent of nominal GDP in both years. Revenues are boosting public finances, while public spending will only increase slightly. While the general government’s financial position is improving, the German federal government is persistently facing high deficits. This is much more alarming as there are still substantial financial risks most notably those related to the crisis in the euro area. Therefore, the fiscal consolidation process in Germany is not yet completed.