Don't panic German growth has slowed but is still steady, institutes say

Snafus in the auto industry dented production and growth forecasts, but experts are confident the economy is far from a recession.
Quelle: AP
German deliveries not running on time.
(Source: AP)

The good news is that Germany doesn’t have to worry about the economy overheating. On the other hand, even though growth is slowing, there is no imminent danger of recession, either.

This is the conclusion of two of Germany’s leading economic think tanks, the Institute for the World Economy IfW in Kiel and the German Institute for Economic Research DIW in Berlin, as they slightly reduced their growth forecasts for this year and the near future.

The cause was primarily this summer’s hiccup in the auto industry as carmakers failed to get their new models certified with a new emissions test and had to throttle back production until they caught up. This cost them €7.5 billion ($8.5 billion) in lost sales and led to a third-quarter decline of 0.2 percent in Germany’s gross domestic product.

“No one expected that the German auto industry of all things would be the only one not to make the transition on September 1,” DIW’s Claus Michelsen said.

Nowhere near recession

The two institutes believe the German economy will continue to grow at this lower level, however. They reduced their growth forecast for 2018 to 1.5 percent, compared to 1.8 to 1.9 percent three months ago.

For next year, forecasts are also slightly lower at 1.6 percent for DIW and 1.8 percent for IfW, with growth continuing at the same rate in 2020.

The German government also lowered its forecast for the year, as Economics Minister Peter Altmaier said Tuesday that GDP would grow 1.5 to 1.6 percent this year instead of the 1.8 percent forecast in October.

The Kiel think tank was warning against an overheated economy a year ago. That danger has since passed, but both research groups emphasize the economy is nowhere near recession now. The government’s economic advisory council, known as the Five Wise Men, led the pack in lowering estimates in early November when it predicted 1.6 percent growth for this year and 1.5 percent for 2019.

The research institutes expect the economy can make up much of the lost ground through the second quarter of next year, as indicated by healthy order inflow and the fact that consumer demand is growing worldwide.

The downturn in exports this summer was also blamed on the auto industry, as exports remained steady in other sectors.

Risks abound

IfW’s Stefan Kooths also blamed this summer’s drought for a dampening effect on the economy. Hot temperatures lowered water levels on the Rhine River, forcing industry to re-route deliveries, causing delays and added costs.

The economists’ relative optimism is tempered, however, by some clouds on the horizon: from US trade disputes, Brexit, riots in France, and Italy’s budget conflict to Germany’s lack of skilled workers and a volatile stock market.

It is impossible to forecast the potential impact if these problems take a turn for the worse. “If there are 25 percent tariffs in trade between the US and EU, then we will have a recession,” DIW’s Michelsen said.

DIW is still counting on a “soft Brexit” despite all the political uproar between now and then. The IfW thinks a disorderly Brexit has become more likely over the past three months, but that is not reflected in its forecast.

DIW called the decline in stock market prices a “normalization” and is not too worried. Unlike the dot-com collapse at the turn of the century, companies now are not overindebted and profits are healthy. Oil prices, which pushed up costs this year, are already declining again.

Domestic demand will be the primary driver of growth in the next two years, the economists believe. The construction industry is operating at maximum capacity given the shortage of skilled works, but the domestic economy is growing thanks to higher wages.

Furthermore, government plans to cut social security contributions, eliminate much of the solidarity tax surcharge and slightly lower taxes will provide just the right amount of stimulus, the DIW said.

Donata Riedel covers economics and financial policy for Handelsblatt. Darrell Delamaide adapted this article into English for Handelsblatt Today. To contact the author: [email protected]

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