Joint economic forecast spring 2019: Significant Cooling of the Economy - Political Risks High

Press release of the project group "Gemeinschaftsdiagnose": German Institute for Economic Research (DIW Berlin), Halle Institute for Economic Research (IWH) – Member of the Leibniz Association, ifo Institute – Leibniz Institute for Economic Research at the University of Munich in cooperation with the KOF Swiss Economic Institute at ETH Zurich, Kiel Institute for the World Economy (IfW), RWI – Leibniz Institute for Economic Research in cooperation with the Institute for Advanced Studies Vienna

Germany’s leading economics research institutes have revised their forecasts for economic growth in 2019 signifi­cantly downward. They expect Germany’s gross domestic product to increase by 0.8%. This is more than one percentage point less than in autumn 2018, when the forecast was still for 1.9% growth. In contrast, the institutes confirm their previous forecast for the year 2020: gross domestic product is expected to increase by 1.8%. These are the results of the Joint Economic Forecast for spring 2019, which will be presented in Berlin on Thursday.

“The long-term upswing of the German economy has come to an end,” says Oliver Holtemöller, head of the Department of Macroeco­nomics and Vice President of the Halle Institute for Economic Research (IWH), which coordinated this spring’s report. The report concludes that political risks have further clouded the global econ­omic environment. However, the economic slump in the second half of 2018 is due primarily to obstacles to production in industry. “We still consider the chance of a pronounced recession to be slight,” Holtemöller adds. The forecast was completed as of March 29, 2019, when it still seemed that a hard Brexit would be avoided. This has now become less likely, but is still possible. However, if a no-deal Brexit occurs, economic growth this year and the next is likely to be significantly lower than indicated in this forecast.

Employment growth is expected to lose momentum, but the number of people in employment will rise from 45.3 million this year to 45.5 million next year. Over the same period, the number of registered unemployed people will de­cline from 2.2 million to 2.1 million. This will bring the unemployment rate down from 4.8% to 4.6%. Consumer price inflation is projected to rise from an average of 1.5% this year to 1.8% in 2020. Domestic inflation will in­crease. The institutes expect the government to see significant fiscal surpluses over the entire forecast period, although they will shrink considerably: while last year’s surplus reached a record high of 58 billion euros, this year’s is likely to be down to 41.8 billion euros and next year’s, 35.6 billion euros.

In view of the economic cooldown, fiscal policy should let the automatic stabi­lisers do their job. It should not seek to consciously save for the sake of Ger­many’s “black zero”; after all, both the German debt brake and the European fiscal policy framework explicitly permit cyclical deficits.

The risks for the German and the global economy have grown since autumn 2018. At the international level, there are threats posed by the trade dispute between the US and China and by the still unresolved Brexit process. At the national level, the economic situation is weighed down by supply bottlenecks, a shortage of skilled workers, and difficulties in the automotive industry.

The Joint Economic Forecast was prepared by DIW (Berlin), the ifo Institute (Munich), IfW (Kiel), IWH (Halle), and RWI (Essen).