German institutes see domestic demand driving growth in 2016, 2017

Robust consumer spending in Germany is helping fuel economic growth, experts say
AFP

Berlin (AFP) – Germany’s leading economic institutes trimmed their growth forecast for the current year on Thursday, but insisted Europe’s biggest economy is enjoying a moderate recovery, fuelled by cheap oil and robust consumer spending. 

The institutes — the DIW in Berlin, IWH in Halle, Ifo in Munich and RWI in Essen — predicted that gross domestic product (GDP) would expand by 1.6 percent this year and then by 1.5 percent in 2017, after growth of 1.7 percent in 2015. 

The 2016 forecast is slightly lower than the 1.8 percent the institutes had foreseen in the last few months of last year. The German government is currently pencilling in growth of 1.7 percent for this year.

“The German economy is in a moderate upturn. Against the background of rising employment, noticeable wage rises and increased purchasing power as a result of falling energy prices, the recovery is being driven by private consumption,” they wrote.

Growth momentum is also coming from spending related to taking in and housing a huge influx of refugees, the institutes continued. 

“In addition, domestic demand is benefitting from low interest rates. But few stimulative effects are being seen from the global economy,” they added. 

The additional spending on refugees, however, will erode the government’s budget surplus, the think tanks said.

Around 10 billion euros ($11 billion) have been earmarked in next year’s budget to cover the costs of taking in and housing more than one million new arrivals in Germany who have fled war and persecution in their home countries.

“Refugee-related spending is on the rise and fiscal policy is also slightly expansive. But a tangible increase in income tax revenues, in sales tax and social contributions, as well as falling interest payments, means the budget surplus could still amount to 11 billion euros this year and 10 billion euros next year,” they calculated. 

– ECB in spotlight –

The institutes said that low interest rates were particularly boosting demand for real estate in Germany, but they saw no risk of a property bubble. 

Some observers have suggested that the European Central Bank’s easy money policies aimed at kick-starting inflation in the single currency area are helping to fuel real estate speculation. 

The ECB has increasingly come under fire in Europe’s biggest economy recently, and even Finance Minister Wolfgang Schaeuble has suggested that its loose monetary policies have aided the rise of right-wing populism. 

But at a news conference in Berlin, Ifo economist Timo Wollmershaeuser said the ECB’s current policy stance was “appropriate” given the very low rate of inflation. 

His colleague at IWH, Oliver Hoeltemoeller, agreed, but conceded that there were “also risks” for financial stability and the implementation of structural reforms. 

The huge number of refugees could put some pressure on the labour market and push the jobless rate up to 6.4 percent in 2016 from an anticipated 6.2 percent in 2016 and 6.4 percent in 2015, the institutes calculated. 

But at these levels, joblessness is still at its lowest level since unification in 1990. 

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