Domestic Strength German Economy Set For Stable Growth in 2017

As Germany inches toward a federal election in the fall, both main parties will be boosted by strong economic forecasts this year.
Economic forecasters are predicting a strong numbers in Germany this year.

It's promising to be a turbulent year for Germany's economy.

The Institute for Economic Research, or IFO, is optimistic about growth in 2017 but warned in its January Business Climate Index that the economy would not be as strong as they had forecast a month ago.

IFO economist Klaus Wohlrabe said the slight decline in the barometer at the beginning of the year was a minor "mood killer," but it should not be overemphasized, because the managers surveyed still hold a positive view of the current business climate.

In particular, they are more optimistic than they were about the export market.

The government too is feeling confident and said in its annual report that “the strong economic situation will continue this year," according to its new annual economic report. The government expects gross domestic profit (GDP) to increase by 1.4 percent this year, which places it in the middle range of forecasts by economic institutes and international organizations, whose growth estimates for 2017 range from 0.9 to 1.7 percent. The IFO and the German industry association, the BDI, predict 1.5 percent growth.

The official government prognosis has the number of jobs in Germany increasing by 320,000 and unemployment declining to 6.0 percent, which would be a new low since German reunification. Gross earnings are expected to rise by 2.5 percent, as they did last year.

 

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"In 2017, an employee will have an average of €2,000 ($2,150) more in his or her pocket than at the beginning of the legislative period," Sigmar Gabriel said on Wednesday at his last press conference as Germany's economics minister. Mr. Gabriel sees consumer spending as a guarantor of recovery. At 2.8 percent, exports are expected to grow somewhat more strongly than in 2016. Because imports, at 3.8 percent, are growing faster than exports, the current account surplus will decline this year, said Mr. Gabriel. The International Monetary Fund (IMF), Organization for Economic Cooperation and Development (OECD) and the European Commission have all criticized Germany's high surpluses in the past and these numbers should appease them.

The RWI Container Throughput Index, which reaches a new high in December, also heralds an improved outlook for exports. It sends a signal that world trade, which has been weak for the last two years, is recovering. The BDI also expects an increase in world trade by up to 4 percent, after two years at only 3 percent.

The euro zone also appears to be entering into a period of stability. The Markit Purchasing Managers' Index showed "continued robust growth" for the bloc this week, as well as the strongest buildup of jobs in nine years.

All of this suggests that new U. S. President Donald Trump's plans to restrict free trade have not affected the economy yet. Whether "Trumponomics" will either harm the European economy through possible punitive tariffs or, on the contrary, benefit it as a result of new investment programs and tax reforms is completely unclear – and gives rise to a fundamental dispute among economists.

"After one week in office, Trump has managed to dampen the mood among German companies," said Andreas Scheuerle of Düsseldorf-based Deka Bank, while Holger Sandte of the Swedish financial services group Nordea believes the outlook is uncertain but not necessarily bad.

 

Germany's economy minister argued beforehand with Finance Minister Wolfgang Schäuble over the report's wording.

Mr. Gabriel also used the last annual economic report before the federal election to take stock of the Social Democrat and Christian Democrat coalition government's economic policy. Germany's economy minister argued beforehand with Finance Minister Wolfgang Schäuble over the report's wording.

While Mr. Schäuble wanted to include praise for the balanced budget, Mr. Gabriel insisted on announcing that the government intended to fight inequality and increase investments. Both sets of statements were included in the final version. "With a view to social cohesion, there is much to be said for limiting material inequality without creating disincentives," reads one phrase, rife with compromise. The report talks about "leeway in the budget" to be used "primarily for investments." As Mr. Gabriel noted, "this is the annual economic report of the entire federal government."

Despite Mr. Schäuble's initial skepticism, Mr. Gabriel got his way with the title of the report: "For Inclusive Growth in Germany and Europe." In a nod to Ludwig Erhard, the first Christian Democrat economy minister in post-war Germany, Mr. Gabriel said: "We expressed this more vividly in earlier decades: Prosperity for all."

Growth that benefits all layers of society is also the objective of two international organizations, the OECD and the IMF. OECD Secretary-General Ángel Gurría has said for years that too much inequality constrains overall growth, and said Germany was one of the countries that should do more to combat inequality. According to new figures from DIW, the gap between the highest and lowest incomes widened between 1991 and 2014. While households with the lowest incomes saw their incomes decline even further, the highest incomes increased by 27 percent.

Nevertheless, the situation has improved for workers during his tenure as economy minister, Mr. Gabriel said, citing the minimum wage and falling unemployment. The minimum wage was introduced in 2015, which is beyond the period that's been studied by the DIW.

 

Donata Riedel covers economic policy for Handelsblatt. To contact: [email protected]