German economy grows stronger in 2018

Posted on 17-12-2017 by D. Voesenek

The German economy will grow even more next year than it already is. This reports the Munich-based economic think-tank Institut für Wirtschaftsforschung (Ifo). It has significantly raised its expectations for growth. Growth of 2.6% is expected for 2018. This is the highest rate since 2011. The current political situation has no impact on activity.

In a press release, Ifo president Clemens Fuest said the German economy is in great shape. Growth will continue deep into 2018. Until recently, an estimate of 2.0% was on the books for next year. For 2017, the institution is counting on 2.3%.

More exports                                                                                                        

Growth is broad-based. 'Many sectors, from construction to manufacturing and distribution, are booming and that is why our confidence index is consistently hitting new records.' The Ifo's figures, show that domestic demand continues to grow stably, but at relatively high levels. Despite government spending slowing down, investment is picking up solidly. With growth picking up in Europe and the world, exports in particular are rising strongly in 2018.

According to the southern German think tank, the large current account surplus will continue to grow. From €252 billion this year to €278 billion in 2019.  As a percentage of gross domestic product, however, the increase is not as large.

Rising budget surplus

The strong growth of the economy leads to the government having more and more money left over. The budget surplus will reach EUR 42.1 billion this year. This amounts to 1.3% of GDP. For 2018 and 2019, the Ifo forecasts 1.5% and 1.7% respectively. It does note, however, that the figures are very uncertain. For instance, the new government may decide to spend more. Also, new spending cuts may be implemented.

On the labour market, the tightness continues. This year, 44.3 million Germans are employed, rising to 45.2 million in 2019. In that year, 2.2 million will be unemployed at home, compared to 2.5 million now. The tightness does not translate into sharp wage increases. Inflation comes in at 1.8% this year. There is 1.9% in the pipeline for 2018, rising to 2.2% in 2019.

Various risks

Of overheating, no one need fear, it was concluded earlier. After all, households and companies do not lean heavily on debt. The correction is expected to be a few years away. If it comes, it will be driven by an external factor outside Europe. For instance, by China, overheating of the US economy or the bursting of a bubble.

The Ifo also calls China a risk for the global economy and Germany. The high debt burden of China's private sector could threaten financial stability. Other risks include a brexit hitting harder than expected, the continued weakness of southern European banks and higher interest rates due to US monetary policy. The Republicans' tax plan will lead to budget deficits, increasing the demand for money. This may translate into higher borrowing rates.