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EMBARGO until 9 December 2015 at 10.00 a.m. CET
Ifo Economic Forecast 2015-2017:
Modest Upswing Continues
Munich, 9 December 2015 – The modest upturn seen in the German economy for some time is expected to continue. Real gross domestic product
will increase by 1.7% this year, and by 1.9% in 2016. The growth rate is
subsequently expected to fall to 1.7% in 2017. Private consumption will
continue to drive the upswing, which will be boosted by a renewed drop in
oil prices, higher earnings and transfers and a lighter tax and social
charges burden on households. In addition, expansive stimuli from fiscal
and social policy will be stronger, not least due to far higher government
expenditure on consumption and transfers related to the influx of refugees. While construction investment is expected to grow sharply over the
forecasting period, equipment investment will only see a modest increase,
despite favourable financing conditions. Since imports are expected to
rise more than exports due to forecasts of strong domestic demand, there
will be almost no stimuli from foreign trade.
World economic situation
The world economy continued to grow at the moderate rate seen in the first half
of the year in the third quarter. The economic situation in emerging economies
was somewhat stronger than in the first six months of the year. This was due to
slightly less negative trends in key commodity-exporting emerging economies
like Brazil, Russia and Indonesia. These countries have suffered from the sharp
drop in the prices of oil, manufacturing and agricultural commodities since the
middle of last year. In Russia economic sanctions resulting from the conflict with
the West are also having a negative effect, while fiscal policy in Brazil is clearly
curbing its economy. Both countries slipped into a deep recession in the first
half of 2015, but the decline in Brazil’s gross domestic product started to slow
somewhat in the third quarter of the year and production in Russia more or less
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stagnated. The economic dynamic in China and in other key commodityimporting emerging economies, by contrast, remained almost unchanged and
moderate by historical comparison. The growth dynamic in China is gradually
starting to lose impetus, which has been reflected in a sustained, structural
trend for several years. In the advanced economies growth in overall economic
output slowed somewhat in the third quarter of 2015 versus the early summer
due to temporary, non-economic factors in the USA. The economic situation
nevertheless remains underpinned by cheap commodity prices in nearly all advanced economies. As in previous quarters this, however, masks highly heterogeneous patterns of economic development in individual countries. The USA
and Britain, for instance, are experiencing a moderate economic upturn. The
pace of economic expansion in the euro area and Japan remains far slower.
Although the international competitiveness of both countries has improved since
mid-2014 due to exchange rate depreciations, economic developments in both
regions are plagued by a multitude of unresolved structural problems.
Monetary policy in the major advanced economies remains very expansive, despite steady divergence since the beginning of 2014. In view of the far more
moderate economic dynamic and the insufficient increase in prices, the European Central Bank and the Bank of Japan have massively expanded their bond
buying programmes during this period. Both central banks have also signalled
their willingness to leave base interest rates at their current level of zero until at
least 2017. By contrast, the US central bank (the Fed) successively scaled back
its bond purchase programme and wound it up completely in December 2014.
The Fed’s Federal Open Market Committee is also expected to make its first
interest rate increase in December 2015 since the outbreak of the financial crisis. An interest rate turnaround also looks set to take place in Britain next year.
This monetary policy divergence has triggered major exchange rate fluctuations
since the beginning of last year. The euro and the Japanese yen depreciated
massively during this period, while an almost entirely opposite trend was seen
in the US dollar and the British pound. The degree of expansiveness in monetary policy has also developed in very different ways in emerging economies
since the beginning of the year. The central banks of many Asian countries
have used the leeway created by moderate inflation to implement interest rate
cuts. In Brazil and Russia, by contrast, monetary policy is clearly restrictive to
offset the high depreciatory pressure on both domestic currencies.
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A successive easing in fiscal policy has been seen in most advanced economies over the past two years, with the sharp drop in government bond rates
considerably easing the burden on government budgets. This should have a
neutral impact both in 2015 and over the forecasting period. Japan is the only
country where there are to some extent sizeable negative economic impulses
coming from the government. In the emerging economies fiscal policy will be
highly heterogeneous over the forecasting period. In India and China public investment programmes will boost the economy. State spending programmes
have also been launched in Russia to offset the effects of the recession. In Brazil, by contrast, fiscal policy has been clearly more restrictive this year and will
be tightened further over the forecasting period.
Outlook for the world economy
Growth in the world economy will continue at the moderate pace seen this
summer in the fourth quarter of this year. In the first half of 2016 the latest sharp
drop in oil prices will give the world economy renewed impetus. This is because
the positive effects on oil-importing countries will be far higher due to the latters’
greater propensity to spend than the negative economic effects on oil exporting
economies. Since these effects will gradually fade over the course of next year,
the global economic growth rate is expected to slow slightly.
The economic situation of the major advanced economies will also be influenced by nominal exchange rate developments over the forecasting period. Export growth in the USA is expected to remain curbed by the strengthening of the
dollar, as opposed to demand for goods and services from the euro area and
Japan, which is expected to rise at a faster rate due to the depreciation of the
euro and the yen. Aggregate economic output in the USA will nevertheless expand more strongly than in the euro area and Japan over the forecasting period.
In the euro area numerous structural problems will continue to weaken economic development, despite the fact that the resulting burdens will gradually decrease due to banking sector, labour and goods market reforms implemented in
many cases. Monetary policy will also remain very expansive. In Japan growth
is only expected to be moderate over the forecasting period. Japan is pursuing
a highly expansive monetary policy, and the gradual scheduled start-up of a
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series of nuclear power plants will lower the country’s energy imports. However,
its clearly restrictive fiscal policy, as well as structural factors like the shrinking
working population and relatively low productivity growth, will prevent any
stronger upswing.
The pace of growth in the emerging economies will change very little in 2016.
Although Brazil and Russia are expected to pull out of recession over the
course of next year and the low oil price will create positive impulses in China,
India and many east Asian economies, this is offset by negative forces that will
prevent any significant economic upturn. The trend towards a slowdown in economic growth in China is therefore expected to continue. Moreover, the slow
rise in long-term interest rates in the USA will lead to a growing deterioration of
financial conditions for emerging economies. Real gross domestic product in
emerging economies will nevertheless increase at almost twice the pace as that
of advanced economies in the forecasting period.
All in all, overall economic output in the world will increase by 3.0% in 2015, by
3.5% in 2016 and by 3.8% in 2017. World trade will only expand by 3.3% this
year, before its growth rate stabilizes at 4.2% in both subsequent years.
Risks
Political tensions in the Middle East and the unclear interests of the parties involved in the various conflicts represent a major risk to world economic development over the forecasting period. The recent terror attacks in Paris made by
one of these parties are not expected to have any significant economic effects.
However, political reactions to the attacks by France and other countries show
the explosive nature of the geopolitical situation in the Middle East. An escalation in the conflicts there could unsettle consumers, producers and investors
across the world and thus considerably curb economic development. In such a
scenario oil prices could also surge, since many Middle Eastern countries are
among the world’s largest oil producers.
There are risks related to the expected gradual tightening of monetary policy in
the USA. The Fed can therefore be expected to make its first interest rate
increases in December 2015. This would increase the relative attractiveness of
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the USA as an investment location and will involve portfolio restructuring at the
expense of other regions. In an extreme case scenario it may once again lead
to capital outflows from the emerging countries, which could, in turn, lead to
strong financial market turbulence; or even to exchange rate crises.
The ECB’s recent decision to extend its bond buying programme may also
threaten economic developments, and not only in the euro area. Easier access
to cheap money can promote the formation of asset price bubbles, which leads
to painful upheavals in financial markets both within and outside Europe when
they burst. Moreover, the ECB’s government bond buying programme in
particular is also creating false incentives for fiscal policy. A series of European
governments, including those of Spain and Italy, are now already in a position to
issue multi-year bonds with negative rates of return. However, in many places
the resulting fiscal buffer is not being used to further reduce the public deficit; or
even to repay debts. This is reducing many euro countries’ ability to absorb
fiscal shocks arising from fiscal policy interventions and makes them more
vulnerable to the changing moods of international capital markets. There is a
growing risk of crisis-like upheavals and a reignition of the European debt crisis
as a result.
German economic situation
In Germany economic production has risen moderately and without any major
fluctuations over the course of this year to date. In the first three quarters of the
year real gross domestic product rose at an annual rate of 1.5%. The moderate
economic upswing was boosted by domestic demand and mainly by consumption. Consumption expenditure by households grew at almost the same pace as
real gross domestic product in the first nine months of the year, boosted by high
real income levels due to the latest fall in oil prices, as well as rising employment. Finally, positive impulses came from purchasing power gains and the migration of refugees. The massive influx of asylum seekers was also reflected in
a clear increase in government spending on consumption. Spending on providing accommodation and social transfers rose.
Compared to consumption, investment activity in 2015 was disappointing on the
whole. The motor driving investment, which seemed to be running flat out in the
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winter half year, started to splutter in 2015. After a strong start to the year, investments in equipment declined. In view of low order inflows, particularly from
countries outside of Europe, companies see no need to invest in expansion.
After a strong start thanks to the mild weather, investment in construction also
turned negative back in spring 2015. Finally, economic developments were also
curbed by foreign trade developments. Apart from turning temporarily positive in
the second quarter, the contribution made by foreign trade to the change in real
gross domestic product in 2015 was negative, especially in the third quarter of
2015. Exports were also virtually stagnant due to the weakness of key emerging
countries, while imports of goods and energy rose very dynamically following
lively economic activity and lower oil prices.
For all that, demand for labour remained very high, despite the introduction of a
national minimum wage in Germany. The seasonally-adjusted number of employed persons was 345,000 higher in October 2015 than in December 2014.
Unemployment also continued to fall. As expected, the migration of refugees to
Germany has not yet impacted the labour market to any significant extent.
Outlook for the German economy
The upturn is expected to continue. This is due to framework conditions for the
German economy that are expected to remain favourable. Monetary policy is
also having an exceptionally expansive effect, and both capital market and borrowing rates are expected to remain low over the forecasting period. The financing conditions for new company and construction investment remain extremely
favourable. In addition, fiscal and social policy is providing increasingly expansive impulses, not least due to the significant increase in government spending
on consumption and transfers in response to the migration of refugees. Finally,
the renewed fall in oil prices increased the scope for other forms of consumer
expenditure. This is another reason why private consumption is expected to
continue to support the upswing, which will also be boosted by rising earnings
and transfers and a lower overall burden on households due to taxes and social
charges. Investment in construction will increase more strongly over the forecasting period. Investment in equipment, by contrast, will only see cautious
growth, despite favourable financing conditions. Capacity utilisation will largely
remain at normal levels, and the export industry will only expand at a moderate
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pace. Exports, however, will rise at a faster pace until the middle of next year,
since the economic situation in Germany’s key trading partner countries will also improve, boosted by low energy prices. In addition, the impact of the sharp
euro depreciation in 2015 will also be felt into next year. Moreover, world economic expansion and the average growth rates in German exports will remain
far below those of previous upturns. Since imports are expected to increase
more than exports due to strong impulses from domestic demand, stimuli in
2016 will primarily come from domestic demand, and not from foreign trade.
By 2017 the impact of several stimuli is expected to largely fade away. Only
government spending on real consumption is expected to remain above average, since immigration flows of refugees seeking asylum are expected to continue – albeit at a slower pace – and the impact of refugee migration on the labour market will only be seen after a considerable time lag.
Overall, real gross domestic product will grow by 1.7% in 2015 on annual average. In 2016 the pace of growth in economic production is forecast to rise to
1.9%, mainly supported by extra demand driven by refugees. In 2017 the
growth rate in real domestic product should return to an annual average of
1.7%.
Refugee migration is expected to clearly leave its mark on the labour market
over the forecasting period. Companies’ high demand for workers is expected to
continue. Moreover, the labour supply available in the market is expected to
grow far more strongly thanks to the soaring number of registered asylum seekers. Overall, unemployment will rise by 23,000 in 2016, and by around 300,000
in 2017. This is based on the assumption that the qualification level among refugees is predominantly low; and that Germany’s nationwide minimum wage
introduced in 2015 will prevent recruitment.
Consumer prices will rise by 0.3% this year, curbed mainly by the fall in energy
prices. Oil prices are no longer expected to have any constraining impact on
prices in 2016, and prices will gradually be driven up by domestic forces. Consumer prices are expected to increase by 1.0% in 2016 on average, and by
1.5% on annual average in 2017.
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In 2015 the German government is expected to post a budget surplus of around
31 billion euros (1% of gross domestic product). In both of the years ahead the
government surplus will fall significantly due to additional expenses related to
the migration of refugees. The surplus will decrease to 12 billion euros (0.4% of
GDP) in 2016, and the budget is expected to be largely balanced in 2017. General government gross debt is expected to fall from around 71% at the end of
2015 to 66% at the end of 2017.
Federal Republic of Germany
2014
2015
2016
2017
(1)
(1)
(1)
a)
Percentage change over previous year
Private consumption
Government consumption
Gross fixed capital formation (GFCF)
Machinery and equipment
Construction
GFCF in other products
Domestic demand
Exports of goods and services
Imports of goods and services
Gross domestic product (GDP)
0.9
1.7
3.5
4.5
2.9
3.1
1.3
4.0
3.7
1.6
1.9
2.7
2.1
4.1
0.7
2.7
1.6
5.6
6.0
1.7
2.0
3.5
2.6
3.5
2.1
2.4
2.1
4.4
5.3
1.9
1.5
2.3
2.7
3.8
2.0
2.4
1.7
4.2
4.8
1.7
42703
2898
43027
2796
43392
2819
43591
3119
6.7
6.4
6.4
7.1
0.9
0.3
1.0
1.5
1.6
1.7
1.4
1.1
- EUR billion
8.9
31.4
12.4
0.1
- in % of GDP
0.3
1.0
0.4
0.0
212.1
260.0
268.0
270.0
7.3
8.6
8.5
8.3
Employmentb) (1.000 persons)
Unemployment (1.000 persons)
Unemployment ratec) (in %)
Consumer pricesd)
(% change on the previous year)
e)
Unit labour costs
(% change on the previous year)
f)
General government financial balance
Balance on current account
- EUR billion
- in % of GDP
1) Forecast by the Ifo Institute.- a) Price adjusted.- b) Domestic employment.c) Federal Employment Agency concept.- d) Consumer price index (2010=100).
e) Per hour. - f) On national accounts definition (ESA 2010).
Source: Federal Statistical Office, Federal Employment Agency, Deutsche Bundesbank,
2015, 2016 and 2017: forecast by the Ifo Institute.
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For a more detailed presentation of the economic forecast cf.
T. Wollmershäuser, W. Nierhaus, T. O. Berg, C. Breuer, J. Garnitz, C. Grimme,
A. Hristov, N. Hristov, W. Meister, M. Reif, F. Schröter, A. Steiner, K. Wohlrabe,
A. Wolf: ifo Konjunkturprognose 2015 - 2017: Auftriebskräfte nehmen wieder zu,
ifo Schnelldienst, to be published.
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