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SUMMARY
Ifo Economic Forecast 2014/2015:
German Economy Gradually Regains Impetus
Munich, 11 December 2014 – After stagnating during the summer period,
the German economy is gradually regaining impetus. Real gross domestic
product (GDP) is expected to rise by 1.5% in 2014 and 2015 respectively.
The recovery will primarily be driven by the domestic economy, which is
benefiting from the decline in crude oil prices. Equipment investment will
gather fresh momentum as rising capacity utilisation rates necessitate
more urgent investment in expansion. Construction investment is also
expected to increase. Private consumption will rise at a similar pace to
real disposable income. Export growth will accelerate thanks to the
improved world economy and the enhanced price competitiveness of
Germany’s export sector boosted by the euro’s weakening against the US
dollar. Imports, however, will grow even faster due to the upturn expected
in the domestic economy.
World economic situation
The pace of world economic growth slowed markedly in summer 2014. Global
industrial production increased by only half as much in the second and third
quarters of 2014 as in the preceding winter period. This development relates
mainly to a considerable slowdown in economic activity in the euro area and
Japan, despite the robust growth rates in aggregate production in other
advanced economies, especially in the USA and Great Britain. Even the slight
acceleration in economic activity in the emerging economies over the past two
quarters was not strong enough to offset the slowdown in the industrialised
economies.
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Monetary policy in the major advanced economies remains very expansive.
While central banks in the USA and Great Britain put a stop to their securities
purchases and held out the prospect of initial base rate increases in 2015, their
counterparts in the euro area and Japan loosened their monetary reins even
further. The degree of monetary policy expansion seen in emerging economies
was also mixed in recent months. Most central banks in these economies were
forced to increase their base rates, several times in some cases, to counteract
high inflation rates or a depreciation of their domestic currency. China’s central
bank was the only institution to slightly step up its expansive monetary policy in
recent months.
Fiscal policy will be less restrictive in most of the major advanced economies,
although to very different degrees. In the euro area in particular fiscal policy is
hardly expected to have any further restrictive impact in 2014 or 2015, as the
urgently needed consolidation efforts of the last three years have already
triggered huge negative economic impulses in many places. In the majority of
emerging economies fiscal policy will remain neutral at the very least. India and
China are the only countries in which the economy will be boosted by public
investment programmes in 2015.
Outlook for the world economy
The global economy is expected to slowly gather momentum over the
forecasting period. In the USA and Great Britain the recovery will continue at
approximately the same average pace as in recent quarters. In the USA in
particular domestic demand will be boosted by the improved asset position of
households and companies, a brightening in the labour and real-estate markets,
expansive monetary policy and the diminishing restrictiveness of fiscal policy.
These factors will ensure that the upturn continues. In India and several Eastern
Asian emerging economies, aggregate production will also expand faster over
the forecasting period.
The latest development in crude oil prices is also expected to boost global
economic developments in the year ahead. Despite geopolitical tensions in
Eastern Europe and the Middle East, the price of a barrel of Brent has dropped
by over 35% since June. This decline was mainly supply-side driven by ramped
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up production in the USA; and to a limited degree demand-side driven by the
cooldown in the world economy. Oil importers like the advanced economies, as
well as China, India and Eastern Asian economies will be the main beneficiaries
of lower oil prices.
The numerous structural problems experienced by several large emerging
economies (Brazil and Argentina), as well as key advanced economies, will act
as a brake on the world economy. The banking sector remains undercapitalised
in several euro area countries, the debt levels of private households and
companies are still very high, international competitiveness is relatively low and
product and labour markets remain fairly inflexible. In France and Italy, in
particular, several urgently needed reforms have not yet been implemented.
These countries are hardly expected to grow during the forecasting period,
which, in turn, will significantly burden developments in the overall economic
output of the currency union. In Japan the pace of growth in the year ahead is
also expected to remain sluggish. On top of a recent drop in the real disposable
income of private households, this sluggishness will primarily be due to the
shrinking potential labour supply, strong segmentation in the energy and
services sectors, as well as an overregulation of labour and product markets.
China’s economy will probably experience a slight drop in growth rates in 2015.
All in all, aggregate world economic production will rise by 2.7% this year, and
by 3.0% next year. World trade is expected to grow by 2.6% in 2014 and by
4.0% in 2015.
Risks
One of the main risks for the world economy remains the poor economic
situation in several euro area countries. Despite the structural reforms carried
out in Spain, Ireland, Portugal and Greece over the last three years, the
adjustments required are far from complete and several structural problems
persist. This is shown, among other things, by the absolutely inadequate
adjustment of relative prices in these countries, which is crucial to restoring their
competitiveness and guaranteeing the long-term sustainability of their external
debt. These economies remain fragile as a result and prone to crises and
volatility. Against this background, the reform backlogs in France and Italy are
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worrying as they cast a shadow over the mid-term growth outlook of both
countries and may give rise to doubts about their solvency.
The falling inflation rates in the euro area, which can now be seen in all member
countries, entail risks and opportunities. Although a significant share of the
decline is due to the drop in crude oil prices, the core inflation rate adjusted for
energy price developments is currently more than double the overall inflation
rate and will also average at 1 percent over the forecasting period. However,
the longer the period of low inflation lasts, the greater the danger that long-term
inflation expectations will be destabilised, putting greater downwards pressure
on inflation. In an extreme case scenario the euro area could slip into deflation.
However, a good share of the deflation currently observed is to be welcomed,
as it stems from the fact that several structurally weak euro countries are
attempting to improve their international competitiveness. This means that the
prices of their products will either rise more slowly than in other places, or even
drop.
Further risks stem from the lasting conflicts between Russia and the Ukraine, as
well as conflicts in the Near East related to threats from Islamic extremists. An
escalation of these conflicts could lead to increases in uncertainty and oil prices,
with a negative impact on the recovery in the world economy. Finally, recent
developments in asset prices also pose significant risks. Despite the global
economic cooldown, the share indices in major stock markets have increased
sharply. A sharp correction could worsen the asset position of private
households, as well as the financing conditions of companies, and have a
negative impact on the world economy. Finally, in China there is a risk that the
downturn in real-estate prices that started in the middle of the year will
accelerate. Since the real-estate boom of the last five years was accompanied
by a massive expansion in borrowing, the economic situation in China may
weaken to a far greater extent than assumed by this forecast should real-estate
prices continue to fall.
Situation of the German economy
Germany’s economy cooled down considerably in the course of 2014. At the
beginning of the year real gross domestic product rose dynamically at a rate of
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0.8%. Indeed, aggregate economic production was fuelled by the mild winter,
which particularly boosted value creation in construction and other sectors
dependent on weather conditions. However, aggregate economic production
subsequently dropped in the spring. On the one hand, the pace of growth was
fully expected to slow in the second quarter of the year, as the quarter-onquarter growth rate was distorted by the preceding positive weather-induced
effect. On the other hand, the downturn also indicated a weakening in the basic
economic trend compared to the winter. The slowdown persisted into the third
quarter; during which aggregate economic production hardly increased at all.
On balance, real gross domestic product stagnated in summer 2014.
The increasing caution with which companies have acquired equipment since
the spring also played its role in weakening the German economy. The
business outlook for companies has clouded over since the beginning of 2014,
which is not only due to economic risks in the world and the euro area, but also
to expensive reform projects by the German Federal government; the latter
have had a negative impact on employment. Construction investment has also
dropped since summer 2014. While this was put down to rebound effects after
the weather-related, excessively strong results of the first quarter, the
deterioration in the investment climate became apparent over the course of the
summer. Against this background, favourable financing conditions failed to
stimulate investment in construction. Regardless of economic conditions, real
consumer spending rose in summer, fuelled by an increase in the total income
of private households. Overall economic developments were also boosted by
external trade. Exports increased by more than imports over the summer.
Economic activity is not expected to decline again. Key indicators suggest that
aggregate economic production will rise slightly in the last quarter of 2014.
Domestic and foreign order intakes as well as industry production increased in
October. Ifo Business Survey indicators also signal a further increase in
aggregate economic production. The Ifo Business Climate Index for German
trade and industry rose for the first time in six months in November. In addition,
the sharp decline in crude oil prices will boost overall economic activity, not the
least through an increase in domestic purchasing power due to terms-of-trade
gains. All in all, aggregate economic production is expected to increase by 0.2%
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in the fourth quarter, translating into an annual average increase in real gross
domestic product equal to 1.5% in 2014.
Outlook for the German economy
The upturn is expected to gain momentum over the year ahead. Adverse factors
should already be largely priced into corporate sentiment, especially in terms of
investment and recruitment decisions. This, in turn, means that the favourable
framework conditions for the German economy are expected to have a stronger
impact. Monetary policy is expected to remain expansive, and interest rates will
stay at a historically low level. The financing conditions for new corporate
investments remain extremely favourable. On balance, fiscal and social policy is
providing expansive stimuli. Investment in new equipment will increase sharply,
as rising production capacity utilisation rates make investment in expansion
more urgent. Construction investment is also expected to grow, but the average
annual rate will lag behind this year’s growth rate due to the large negative
carry-over effect. Private consumption will grow at a similar pace to increases in
real disposable income. All in all, stimuli will come from the domestic economy
in 2015, and not from net exports. Although exports will grow at a faster pace -since the world economy is improving and German exporters will enjoy greater
price competitiveness in other markets outside the euro area thanks to the
euro’s depreciation against the US dollar -- exports will nevertheless be
outstripped by growth in imports driven by the strong domestic economy.
Overall, real gross domestic product is expected to grow by 1.5%.A quarter of a
percentage point of this figure is due to the sharp drop in oil prices alone.
The dynamic in the labour market weakened gradually towards the end of the
year. Unemployment only fell by around 50,000 persons in 2014. Since net
immigration increased the labour supply, employment is nevertheless expected
to have increased by around 370,000 persons on average. An increase in real
labour costs, especially due to the introduction of the minimum wage, will
constrain any further increase in employment. Demand for so called mini-jobs in
particular is expected to fall. Unemployment, however, will remain almost
unchanged, since a large share of persons with mini-jobs are either already
registered as unemployed, or are not included in the unemployment statistics if
they lose their jobs. In addition, a large number of people are expected to take
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advantage of the full pension at the age of 63 to withdraw from the labour
market. In view of all these factors, the annual average number of persons
employed is expected to increase by 190,000, while the unemployment rate will
drop slightly to 6.6%.
Consumer prices are expected to increase by just 0.9%, with the drop in crude
oil prices having a particularly dampening impact. In 2015 crude oil prices are
not expected to have any further downward effect on prices. In addition, the
introduction of a minimum wage is expected to boost the domestic upward price
trend. Here it is assumed that the labour cost hike driven by the minimum wage
can partly be passed on to consumer prices and is expected to boost inflation
by an additional ¼ percentage point. Due to its low level at the beginning of the
year, the increase in the average annual consumer price level in 2015 will be
slightly smaller than in 2014.
The German government’s budget surplus will total around 10 billion euros in
2014 (0.3% of nominal GDP). The budget surplus is expected to fall to 3½
billion euros (0.1% of GDP) next year. General government gross debt looks set
to fall to 70% by the end of 2015.
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For a detailed presentation of the forecast (in German), please consult T.
Wollmershäuser, W. Nierhaus, T. O. Berg, C. Breuer, T. Buchen, C. Grimme, S.
Henzel, A. Hristov, N. Hristov, M. Kleemann, J. Plenk, L. Wieland, K. Wohlrabe,
A. Wolf: ifo Konjunkturprognose 2014/2015: Deutsche Wirtschaft gewinnt
allmählich wieder an Schwung, ifo Schnelldienst, to be published.
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The forecast can be consulted and downloaded at http://www.cesifogroup.de/prognose
or
requested
by
sending
an
email
to
[email protected].
Contact: Prof. Dr. Timo Wollmershäuser ([email protected], Tel.
089/9224-1406).
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Information and research is what the Ifo Institute has stood for ever since it was founded in January 1949. The Institute
takes the legal form of a registered association and is recognised as a charitable, non-profit organisation. Ifo is one of
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