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DIW Winter Projection 2013

Press Release of January 9, 2013

The German economy has recently lost momentum but is anticipated to accelerate markedly in the course of 2013. On annual average, real GDP will increase by 0.9 percent; the corresponding figure for 2012 is expected to be 0.8 percent. During the course of 2013, however, expansion will accelerate noticeably. The German economy will grow slightly over two percent in 2014. The temporary economic weakness will impact the labor market only moderately; the unemployment rate which dropped to less than seven percent in 2012 will revert to an annual average of seven percent in 2013. However, in 2014, this figure will noticeably decline. Disposable income will also increase significantly in 2013, and private consumption will be an important source of economic growth.

The crisis in the euro area remains the main burden on the German economy. High unemployment accompanied by private and, in particular, public debt reduction in the crisis countries is weakening demand. The strain on the financial markets was slightly alleviated by the European Central Bank’s decision to intervene in the government bonds markets, by buying any quantity of bonds deemed necessary. However, financing conditions for businesses remain unfavorable in the crisis countries. This has a negative impact on investment activity and further hampers economic development. While growth in the euro area during the forecasting period is likely to remain weak, economic development in the rest of the world is accelerating again since the second half of 2012, particularly in the large emerging nations such as China where growth has been bolstered by expansionary monetary and fiscal policy.

The brightening global economic conditions also benefit German exports which will noticeably increase during the course of 2013. As a result of the improved market opportunities, companies’ investment activities will, in turn, also increase, especially since the German economy is able to profit from extremely favorable financing conditions. Wages are anticipated to rise noticeably during the course of 2013 and 2014. As the German inflation rate is forecast to remain around the two-percent mark, we are likely to see palpable gains in households’ purchasing power—despite the temporary downturn in employment—which will result in a significant increase in private consumption. Thus, domestic demand is likely to become the driver of growth in 2013 and 2014. External trade is expected to make a positive, though only moderate contribution to economic growth. Also in the medium term, German economic development is likely to be characterized by favorable financing conditions, wage increases, and dynamic domestic demand. During the five years of the medium-term forecasting period, the German current account balance surplus relative to GDP will decline slightly.

Public finances will continue to improve; the general public budget will show a surplus in 2013 and 2014. However, this is primarily due to favorable economic conditions. On the expenditure side, measures have already been adopted which will entail higher spending. There is currently no scope for this, particularly since the federal budget remains substantially underfinanced and faces significant risks, especially in the medium term.


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