Press Release of June 17, 2016
DIW Berlin forecast: GDP is expected to increase by 1.7 percent this year and 1.4 percent next year – consumer spending still a growth driver, but expanding with less momentum than before – global economy failing to gain traction – Brexit would significantly hinder growth
According to the German Institute for Economic Research’s new summer forecast, the German economy—backed by solid domestic activity—will continue its uptrend, and is expected to grow by 1.7 percent this year.
This figure is one tenth of a percentage point higher than DIW Berlin predicted in the spring forecast, and this change is due to the surprisingly strong first quarter: industrial production grew unexpectedly strongly, employment increased markedly, and wages are noticeably higher, with the result that consumer spending is on the rise. Energy prices are increasing again, however, which is dampening real income. Because significantly fewer refugees are coming to Germany than had been predicted in previous forecasts, the positive economic impulses associated with migration are expected to be smaller, especially in the coming year. GDP growth will slow down somewhat in 2017—to 1.4 percent—primarily due to the fact that there are fewer workdays next year than this year.
Marcel Fratzscher (President of DIW Berlin): “Economic growth in Germany is likely to be relatively robust this year and next—assuming there is no Brexit, that is. In the coming year alone, a Brexit could reduce Germany’s growth by 0.5 percentage points, as a result of lower exports alone. The goal of economic policy should be to improve Germany’s growth potential through more targeted and investment-friendly policy measures.”
Ferdinand Fichtner (Head of the Department of Forecasting and Economic Policy): “The global economy has yet to gain traction. Growth is slowing in China, and Russia and Brazil are still stuck in recession. Weak growth in the emerging markets is in turn having negative effects on the exporters, particularly in Germany. Moreover, the discussion of a Brexit itself is creating major uncertainties. Should the UK decide to withdraw from the EU, this could start negatively impacting the German economy this year.”
Simon Junker (Deputy Head of the Department of Forecasting and Economic Policy and an expert on the German economy): “The German economy continues to grow, supported by domestic demand. Exports as well are also having a more marked influence on growth once again. Employment and private consumption, however, are losing some momentum.”
Kristina van Deuverden (Research Associate in the Department of Forecasting and Economic Policy and an expert on finance): “The public budget will conclude this year and the coming year with surpluses. The budgetary margins will be narrower, however, so these surpluses should be used wisely. Given the demographic development, improving work incentives is recommended; this would be possible through reducing social security contributions.”
Brexit would hinder Germany’s economic growth in 2017
The possibility of a Brexit poses a risk to the German economy, as such a decision would have a negative impact on the UK’s foreign trade. Since the UK is Germany’s third-largest trading partner, this is likely to have a noticeable domestic impact as well, primarily in export-oriented sectors such as the automotive, chemical, and pharmaceutical industries, as well as mechanical engineering. The total value of Germany’s exported goods and services to the UK is roughly 120 billion, or roughly eight percent of all German exports.
The direct effect of a Brexit could hinder the growth of Germany exports: according to DIW Berlin’s calculations, this could amount to one percentage point in the coming year, or roughly 15 billion euros. This change alone would reduce the growth of the GDP by 0.5 percentage points next year and 0.1 percentage points this year. It should be noted here that these estimates reflect only the direct effects on German exports to the UK. Indirect effects, such as financial market turmoil, declining direct investment, and price effects are difficult to predict accurately and are therefore not considered in these calculations.
Global economic growth weaker than previously predicted
Another potential complication for German exports is the weaker-than-expected performance of the Chinese economy. While demand in Europe is especially robust, important markets in the emerging countries are developing with extreme restraint: China still has excess capacities to dismantle, which is slowing growth, and Brazil and Russia are still stuck in recession. On balance, the global economy is expected to grow by 3.2 percent, which is somewhat weaker than DIW Berlin predicted just three months ago. In the euro area as well, overall growth is only modest: the economic performance in the monetary union will likely increase by 1.6 percent this year and by 1.7 percent next year.
Employment in Germany still on the rise
In Germany, the strong domestic economy remains an important growth-driver. Employment growth continues, albeit at a slightly decreasing rate: the number of employed individuals will increase by 530,000 this year and by 380,000 next year. The unemployment rate should continue to drop, to 6.1 percent this year and to 6.0 percent next year.
Although expenditure on the accommodation, care, and integration of refugees will be significant—nearly 12 billion euros this year and just under 13 billion euros next year—public finances will close both years with surpluses. Margins will become narrower, however; DIW therefore recommends that economic policy focus on measures that increase the chances of future growth. These include targeted funds for investment as well as incentives to work through a reduction in social security contributions.