Economic Optimism German Investment to Boom in 2016

German public and private investment is set to jump 6 percent in 2016, fuelled by record low interest rates, buoyant economic growth and government spending on refugees.
A worker in a Siemens turbine factory in Görlitz, eastern Germany. Demand for investment goods is projected to rise in 2016.

One year ago, Germany faced calls to boost its sluggish corporate and public investment, with critics warning that bridges, roads and many public buildings were in urgent need of repair. The government was accused of being too focused on balancing its budget, and neglecting necessary investments as a result.

The government responded. In spring 2015, a panel of experts set up by Economics Minister Sigmar Gabriel presented a “10-point plan for more investment, growth and jobs.” To be sure, not much has happened since then. Even without the action plan, investments rose by 1.7 percent in the first quarter of 2015 from the previous quarter – only to fall slightly in the following two quarters.

It’s hard to predict and steer investments in a market economy. Investment decisions hinge on business expectations and can rapidly be changed by geopolitical events. It comes as no surprise that in light of the Greek crisis, China’s market turmoil and fears of terrorism, some investors shelved planned projects last year.

But there are good chances that investment will pick up again in 2016. According to a survey by the Munich based Ifo Institute, German business plans to boost investment by 6 percent in 2016.

The Swiss-based World Economic Forum ranks Germany as the most competitive country in the European Union.

A separate survey by IW (Institute for Economic Research), a Cologne-based private think tank, reinforces that optimism. The respondents overwhelmingly indicated that they would be boosting outlays in 2016. In 15 of the 46 sectors surveyed, the signs point to increased investment. Only 6 sectors expected a decrease, mining and the timber industry among them.

The Kiel Institute for the World Economy predicts that gross fixed capital spending will increase 2.9 percent this year, accelerating to 3.6 percent in 2017. The head of the Kiel Institute, Stefan Kooths, said the upturn in investment would last “not least because monetary policy is likely to remain very expansive for significantly longer than in previous upturns.”

The German Institute for Economic Research (DIW) in Berlin predicts a 2.4 percent increase in investment in 2016.

Ulrich Grillo, President of the Federation of German Industries, predicts the German economy should see “about 2 percent” growth this year. That would be its strongest performance since 2011.

The German Council of Economic Experts predicts that government investment will jump 6 percent in 2016 after a 1.6 percent rise in 2015.

The government is also underpinning economic growth in Germany. After all, the state is responsible for maintaining roads, bridges and schools, and has to accommodate the 1 million refugees who arrived in Germany in 2015.

According to the German Council of Economic Experts, a body that advises the government, state investment will likely jump 6 percent in 2016 after 1.6 percent in 2015. The increase reflects added federal spending in the energy and climate change sectors as well as support for municipal investment programs.

German municipalities complain that that’s not nearly enough. They say that income tax would need to be almost doubled for a year to finance all the necessary projects. From their point of view, the spending gap continued to rise in 2015 and now adds up to €132 billion, or $144 billion. To finance all these requests, however, annual income tax revenue would have to almost double - but nobody wants that. So there are doubts whether some of the projects are really necessary, or just a wish-list.

Investment conditions in Germany don't appear to be that bad after all. The head of Global Competitiveness and Risks at the Swiss-based World Economic Forum, Margareta Drzeniek-Hanouz, in September ranked Germany as the most competitive country in the European Union. She wrote that Germany was profiting from higher innovative strength and a high level of business development, and that those were the qualities the country needed to remain competitive.

Only Switzerland, Singapore and the U.S. have better investment conditions, according to the ranking.


Axel Schrinner writes about tax and finance policy for Handelsblatt. To contact the author: [email protected]