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Joint Economic Forecast Spring 2014
Upturn in German Economy, but
Economic Policy Creates Headwind
Press summary
Embargo until:
Thursday, 10 April 2014, 11.00 a.m. CEST
Joint Economic Forecast Project Group
Completed in Halle (Saale) on 8 April 2014
Summary: Upturn in German Economy, but Economic Policy
Creates Headwind
The German economy is experiencing an upturn in spring 2014. Gross domestic product
(GDP) is expected to grow by 1.9 percent this year. The 68 percent projection interval
ranges from 1.2 percent to 2.6 percent. Domestic demand is the main driver of growth.
Consumer prices will increase by a moderate 1.3 percent in 2014. The number of persons
in employment looks set to rise steeply once again in 2014. Economic activity, however, will
have to weather an economic policy headwind. The entitlement to a full pension as of 63
years is a step in the wrong direction and the introduction of the minimum wage will curb
the rise in employment in 2015.
World production grew strongly in the first few months of 2014. Impetus particularly came
from advanced economies, which have gained momentum over the course of the past year.
The USA and Great Britain are experiencing an upturn and the economy in the euro area is
slowly recovering from recession. A number of emerging economies, however, have been
battling with capital outflows and currency depreciations since last summer.
Monetary policy in the advanced economies remains expansive; with base rates at zero percent or just above. The US Fed has announced that it will keep interest rates low, despite the
steep fall in the unemployment rate; and the ECB lowered its main refinancing rate to 0.25
percent in November.
Fiscal policy in the advanced economies will also remain restrictive in 2014, albeit to a lesser
degree than in 2013. In the USA the fiscal policy blockade that constituted a major threat in
recent years has been lifted, with Republicans and Democrats reaching key compromises over
the winter. Fiscal policy in the euro area is no longer expected to be overly restrictive this
year.
World production will expand at around the same pace as in the second half of 2013 during the
forecasting period. The upturn will even gain impetus somewhat in the USA. Growing consumer and corporate confidence suggest that the euro area’s economy is expected to recover further.
The burden of debt costs on companies and households will decrease, asset prices will rise once
again in most countries and labour markets will stabilise. The dynamics of demand, however,
will remain subdued, as targeted improvements in the balance sheets of banks and companies,
and in the net asset position of households, have not yet been achieved; and the difficult situation
in the labour market will continue to curb private consumption. Production increases in emerging
economies are not expected to be quite as high as in recent years. All in all, the Institutes forecast
a 2.9 percent increase in world production in 2014, and a 3.1 percent increase in the following
year.
Current developments in the capital markets of emerging economies pose a threat to the world
economy. Although exchange rates have now stabilised after January’s depreciations, individual
events such as, for example, the Russia-Ukraine conflict, could trigger further capital outflows
and currency depreciation in the future.
The unexpectedly steep decline in price pressures in the euro area poses a further threat to the
economy. Such surprisingly weak price pressures mean that the real burden of old debts are
higher than expected. The euro area is nevertheless a long way off deflation, or a falling price
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level that is perceived by companies and households as an ongoing process; and inflation is expected to pick up in the course of the current recovery.
The German economy is experiencing an upturn in spring 2014. Production has been increasing
for a year, employment is rising faster than previously and sentiment among companies and consumers has improved considerably. The number of incoming orders is also rising. Although demand from emerging economies is now less lively, the economy is recovering in the rest of the
euro area, which is Germany’s most important market. Credit conditions remain extremely favourable and uncertainty, especially with regard to the euro crisis, has continued to fade. Against
this background, investment activity gained momentum, whereby construction activity was also
been boosted by the mild winter.
The Institutes expect production to increase significantly during the rest of the year. Domestic
demand will be the driving force. Low interest rates will continue to stimulate investment in residential construction. Public sector construction investment will be supported by the strong financial position of many local authorities, while money from the flood relief funds will also
boost investment activity this year. Exceptionally good financial conditions for companies, rising
capacity utilisation rates, as well as the high levels of confidence reported in business surveys
also point to a further acceleration in corporate investment. The biggest contribution to aggregate
economic production, however, will be made by private consumption, which will be bolstered by
a faster increase in disposable income and rising employment levels. International trade, by contrast, is not expected to provide any impulse. International demand for German products should
pick up slightly in line with the world economic dynamic. However, the steep increase in equipment investment, which typically has a high import content, will lead to a larger increase in imports than in exports.
All in all, gross domestic product is expected to increase by 1.9 percent this year. The 68 percent
projection interval will range from 1.2 percent to 2.6 percent. Aggregate economic production
will continue to grow and unemployment will fall. The continued increase in the potential workforce is taken into account in these forecasts. Although the potential workforce will shrink per se
due to the introduction of full pension entitlement as of 63 years of age in July 2014, persisting
high levels of net immigration will more than compensate for this decrease. Upward pressure on
wages will increase as a result of the improved labour market situation. The rise in consumer
prices, however, will be very moderate at 1.3 percent. Lower energy prices compared to last year
have an impact here; excluding energy, the core inflation rate of 1.6 percent will correspond
more to the economic situation. Fiscal policy will mainly remain expansive due to the expansion
of pension benefits planned by the German government. Thanks to the favourable economic situation, and resulting income increases, however, the German Federal State’s financial position
will continue to improve. The budget surplus will total 3.6 billion euros or 0.1 percent of nominal
gross domestic product this year.
The rate of expansion in 2015 will remain high. No positive impulses can be expected from
international trade, on balance, but the uptick in domestic demand will remain strong. It will
nevertheless be curbed by the introduction of a nationwide hourly minimum wage of 8.50 euros
scheduled for 1 January 2015. The economic implications of this measure are extremely difficult
to assess, partly because such state intervention in the German labour market is unprecedented to
date. Drawing on the experiences of other countries is of little use, since their institutional
frameworks bear little similarity to that of Germany. A large number of the persons who will be
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affected have mini-jobs, a form of employment that does not exist in other countries. Moreover,
the minimum wage in Germany will probably apply to a far larger share of employees than was
the case in most of the other countries when a minimum wage was introduced. Many suppositions and assumptions must therefore be made to quantify the implications of a minimum wage
for the labour market and economic developments. Taking into account exceptions and transitional provisions, the Institutes estimate that around four million employees will be affected by
the introduction of a minimum wage in 2015, and that around 200,000 jobs will be initially lost
that year as a result. Aggregate hours worked should drop by 0.3 percent as a result. The decrease in gross domestic product, however, will probably only total 0.1 percent, as the jobs lost
have comparably low productivity levels.
Taking the minimum wage effect into account, gross domestic product is expected to increase by
2.0 percent in 2015. The high number of working days compared to 2014 is also a contributing
factor; and aggregate economic production adjusted for working days will increase by 1.8 percent. The rise in consumer prices will accelerate to 1.8 percent, of which 0.2 percentage points
will be due to the pass-through of a wage increase fuelled by the introduction of the minimum
wage. The annual average number of unemployed persons will rise slightly by 18,000 persons,
while the unemployment rate will remain at 6.7 percent. Fiscal policy will be slightly expansive.
The State’s budget surplus will increase to 14 billion euros or by 0.5 percent in relation to nominal gross domestic product.
In addition to the difficulties related to assessing the implications of a minimum wage, another
uncertainty factor for the forecasting period is how relations between Russia and the European
Union will develop in view of the Russia-Ukraine conflict. Sanctions on cross-border trade in
goods and capital, and especially limitations on Russian oil and gas exports, would have a serious impact on both Russia and Germany.
Economic policy is creating a headwind for the German economy. The new federal government
considers four areas as strategically important: the improvement of social participation opportunities and equitable participation through improved education and labour market integration,
investment and innovation policy, the energy policy turnaround and the stabilization and deepening of European economic and monetary union. The majority of the Institutes believe that many
of the measures taken will not lead to the achievement of goals in the area cited above, but will
merely create new problems. The nationwide minimum wage will tend to reduce the employment prospects of low-skilled workers overall and – since transfers are reduced – it will hardly
help to reduce poverty at all. The entitlement to a full pension as of 63 years of age counteracts
efforts to adapt pension entitlements to rising life expectancy and will instead serve to curb production potential. In public sector investments there is an excessive emphasis on additional expenditure per se. This may be reasonable in areas like infrastructure and education, but improvements in quality are equally as important and have been neglected to date. The way in
which the energy policy turnaround is being implemented is curbing investment due to the uncertainty that it entails. Stability risks also slumber on in the euro area. The key issue now is to
clean up bank balance sheets in the crisis-afflicted countries in order to avoid a long phase of
subdued economic development and the risks – including for price stability – that this entails.
The DIW Berlin and WIFO consortium did not share the assessments of the majority of the Institutes in key points of economic policy. Its views are presented in the section entitled: “A Different Opinion”.
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Joint Economic Forecast Spring 2014
Federal Republic of Germany
2012
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)
2013
2014
2015
(1)
(1)
a)
0,8
1,0
-2,1
-4,0
-1,4
3,4
-0,3
3,2
1,4
0,7
0,9
0,7
-0,7
-2,4
0,1
3,0
0,5
0,8
0,9
0,4
1,5
1,0
4,8
5,6
4,3
4,6
1,8
5,9
6,1
1,9
1,8
1,1
4,7
8,4
2,4
4,5
2,2
6,2
7,2
2,0
41608
2897
41841
2950
42151
2865
42236
2883
6,8
6,9
6,7
6,7
2,0
1,5
1,3
1,8
2,8
2,0
1,4
2,0
- EUR billion
2,3
0,3
3,6
14,0
- in % of GDP
0,1
0,0
0,1
0,5
198,6
206,0
224
228
7,4
7,5
7,9
7,7
Employmentb) (1.000 persons)
Unemployment (1.000 persons)
Unemployment ratec) (in %)
d)
Consumer prices
(% 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 Institutes.- 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 1995).
Source: Federal Statistical Office, Federal Employment Agency, Deutsche Bundesbank,
2014 and 2015: forecast by the Institutes.
Members of the Joint Economic Forecast Project Group:
Institut für Wirtschaftsforschung Halle
www.iwh-halle.de
Press contact Tel.: (0345) 7753 720
Email:
[email protected]
in cooperation with:
Kiel Economics
www.kieleconomics.de
Deutsches Institut für Wirtschaftsforschung e.V.
www.diw.de
Press contact Tel.: (30) 89789 252
Email:
[email protected]
in cooperation with:
Österreichisches Institut für Wirtschaftsforschung
www.wifo.ac.at
Ifo Institute – Leibniz Institute for Economic Research at the University of Munich
www.ifo.de
Press contact Tel.: (089) 9224 1218
Email:
[email protected]
in cooperation with:
KOF Konjunkturforschungsstelle der ETH Zürich
www.kof.ethz.ch
Rheinisch-Westfälisches Institut für Wirtschaftsforschung
www.rwi-essen.de
Press contact Tel.: (0201) 81 49 292
Email:
in cooperation with:
Institut für Höhere Studien Wien
www.ihs.ac.at
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[email protected]