Brexit decision could cost the German economy 0.3 percentage points of growth in 2017

Press Release of August 5, 2016

Brexit putting a strain on trade and dampening investment across the globe – German economy likely to be affected – uncertainty about exports – investment will be restrained, and both income and consumption will lose momentum

Due to the Brexit decision, the German economy is expected to grow by 0.1 percentage points less this year and by 0.3 percentage points less next year than previously forecasted. This is the result of an updated forecast prepared by the experts at the German Institute for Economic Research (DIW Berlin) based on calculations by the National Institute of Economic and Social Research (NIESR) in London.

German Institute for Economic Research (DIW Berlin)

The German Institute for Economic Research (DIW Berlin) is one of the leading economic research institutions in Germany. Its core mandates are applied economic research and economic policy advice as well as provision of research infrastructure. As an independent non-profit institution, DIW Berlin is committed to serving the common good. The institute was founded in 1925 as Institut für Konjunkturforschung (Institute for economic cycle research). Since 1982, the Research Infrastructure SOEP (German Socio-Economic Panel Study), a long-term study, is affiliated to DIW Berlin. The institute has been headquartered in Berlin since its founding. As a member of the Leibniz Society, DIW Berlin is predominantly publicly funded.

According to DIW Berlin’s assessment, the probable increase in future trade costs as well as uncertainty about the UK’s economic development will most likely reduce companies’ propensity to invest. The lower demand associated with this investment restraint will inhibit the German economy, which is strongly aligned with capital goods exports. This is expected to further dampen investment activity in Germany’s export sector, and due to slightly weaker income development, leads to less dynamic consumption. Global economic growth should be dampened somewhat by the Brexit decision, and apart from the UK, the euro area is likely to be affected the most.

“There is uncertainty in many respects,” explains Ferdinand Fichtner, Head of the Department of Forecasting and Economic Policy at DIW Berlin. “This uncertainty is already leading to weaker economic development – well before the actual Brexit has even taken place.”

German economy doubly affected

Due to its strong focus on exports and capital goods, the German economy will be doubly impacted by the effects of the Brexit decision. The demand for German exports will experience less growth, with capital goods exports experiencing particularly weak development. Compared to a no-Brexit scenario, German export growth is likely to be 0.3 percentage points lower this year and 1.2 percentage points lower next year. The dampening effect is not as pronounced in the case of imports, such that foreign trade will contribute less to economic growth on balance than it would have in a no-Brexit scenario. German investment is also expected to be weaker than previously forecasted. DIW Berlin’s economic experts predict that equipment investment growth will be 0.3 percentage points less this year and 0.9 percentage points less in the coming year. On the other hand, the Brexit should actually have a favorable impact on German construction growth, since investors will be seeking alternatives to their UK investments, even if the higher demand is expected to drive up prices in the short term.