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PRESS RELEASE
EMBARGO 26 June 2014 8:45 am CEST
Ifo Economic Forecast 2014/2015:
Upturn in German Economy Continues
Munich, 26 June 2014 – The upturn in the German economy is continuing.
Real gross domestic product (GDP) is expected to increase by 2.0% this
year and by 2.2% in 2015. As in 2013, the upturn is driven by domestic
demand. Growth in equipment investment will accelerate due to high capacity utilisation rates, necessitating investments in replacements and
expansion. Construction investment will also continue to rise significantly, driven by a reluctance to invest abroad and low interest rates. Private
consumption is expected to increase at a similar pace as real disposable
income levels. Export growth will accelerate thanks to an improvement in
the world economy. Imports, however, will grow at an even faster rate due
to the strong expansion of domestic demand.
World economic situation
Thanks to developments in the advanced economies, growth in the world economy has picked up slightly since summer 2013. The economic recovery in the
USA, Great Britain and Japan gained momentum, while the euro area emerged
from a recession that lasted almost two years. Although the emerging economies continued to post higher growth rates than advanced countries, the economic expansion in the former remained relatively weak by historical standards,
and has slowed down even further since summer 2013 in some areas.
Monetary policy in the major advanced economies remains very expansive.
Central banks in Japan and the euro area are expected to continue to pursue a
highly accommodative policy, whereas initial increases in base rates are expected in the USA and Britain during the forecasting period in view of the
strengthening economic recovery. Monetary policy has become more restrictive
in key emerging economies since summer 2013. Central banks reacted to the
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strong depreciation of their currencies - triggered, among other factors, by the
monetary policy turnaround in the USA - with interest rate increases.
The restrictiveness of fiscal policy will differ significantly across the major advanced economies both this year and in 2015. In the euro area fiscal policy interventions will have very little impact on aggregate economic output. In the
USA and Japan fiscal policy is expected to remain restrictive. In the majority of
the emerging economies the effect of fiscal policy is mostly expected to be neutral. India and China are the only nations in which public investment programmes are expected to reinforce economic activity this year.
Outlook for the world economy
The pace of global economic expansion will pick up moderately over the forecast horizon, primarily driven by the advanced economies. The US economy will
gain impetus, boosted by an improvement in the asset position of households
and companies, further brightening in the labour and real-estate markets, and
expansive monetary policy. Economic developments in the euro area will remain plagued by complex structural problems that are still present in several
member states and will take some time to solve. The recovery in aggregate
economic activity will temporarily stabilise, despite the continued existence of
major differences between member states. Growth in the German economy, in
particular, will far outstrip the euro area average for the forecasting period, while
economic momentum in France and Italy will be relatively weak. The situation in
the crisis-afflicted countries of Ireland, Portugal and Spain is expected to be
somewhat more positive, although the economic situation remains fragile.
Greece is still waiting for an economic recovery, but several years of recession
may come to an end in 2015.
The pace of expansion in emerging economies will barely pick up in the forecasting period. Although they will benefit from the economic upturn in key advanced economies, the gradual rise in long term interest rates in the US will, at
the same time, result in a steady deterioration of financing conditions for emerging economies. Nevertheless, aggregate economic production in emerging
economies will grow at over twice the rate as in their advanced counterparts.
Russia is the only country that is expected to experience an economic downturn
this year. All in all, aggregate world economic production will rise by 2.9% this
year and 3.3% next year.
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Risks
One of the main risks for the world economy remains the fragile situation in the
euro area. Despite the reform measures recently introduced by several member
states, the adjustment process is far from complete. As a consequence, many
of these countries remain far too expensive to be competitive. As in the past
three years, crises could erupt at any time.
Falling inflation rates in the euro area, which can now be seen in all member
states, entail risks and opportunities. The fall in inflation is admittedly largely
due to the appreciation of the euro and developments in the price of energy
commodities and food. Moreover, disinflation, or even deflation, is thoroughly
desirable for crisis-afflicted countries in the mid-term, since it would facilitate an
urgently needed real depreciation versus key trading partners and the longawaited improvement to their international competitiveness. At some point,
however, a long phase of low inflation, affecting the healthy part of the monetary
union as well as the prices of goods and services, could lead to a downward
revision of long-term inflation expectations by investors, consumers and producers. In extreme cases, a spiral of inflation decreases and successive drops
in inflation expectations could arise, resulting in a lasting phase of deflation.
However, according to the Ifo Institute’s estimates, the positive effects of a correction of relative goods prices continue to prevail for the moment.
Lastly, there are geopolitical risks related to the lasting Russia-Ukraine conflict
and recent civil-war like tensions in Iraq. An escalation of the conflict with the
Ukraine could lead to a spiral of sanctions by both sides between Russia and
the West. Civil war in Iraq could politically destabilise large parts of the Middle
East. Since this region is among the world’s key oil producers, disruptions there
could lead to an oil price spike and may trigger a slowdown in global economic
momentum.
Situation of the German economy
Aggregate economic production in Germany rose sharply by 0.8% in the first
quarter of 2014. The increase in real GDP in the first quarter of 2014 was entirely fuelled by domestic demand. Equipment investment rose by 3.3% versus the
previous quarter thanks to higher capacity utilisation and more favourable earnings outlook and financing conditions; completing the economic turnaround. The
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upturn in construction investment was even brisker at 3.6%, boosted by the exceptionally mild winter. Private consumption expanded by 0.7% in real terms,
fuelled by the rise in employment and a slight decline in the savings rate. Foreign trade itself contributed negatively to the change in real GDP after the turn
of the year. While exports increased by 0.2%, there was a 2.2% upturn in imports against a background of lively domestic demand. However, it is important
to bear in mind that this effect only reflects a slight drop in net capital exports
and higher investment in Germany, which in themselves have favourable supply
and demand effects on German economic growth.
Although the most important economic indicators have remained at the high
level of recent months, they did not continue to rise any further as at the beginning of the year. The most recent decreases in the Ifo Business Climate Index
were primarily due to growing uncertainty among German manufacturers over
the Russia-Ukraine conflict. Since the spring upturn was also particularly weak
this year due to the mild winter, the 0.3% growth in aggregate economic production that will be seen for the second quarter is far less dynamic than in the previous quarter.
Outlook for the German economy
The general economic trend in the forecasting period will remain clearly upwards during the forecasting period and the upturn will continue. If, as assumed
by this forecast, current geopolitical risks do not materialise, the business conditions for the German economy will remain favourable. Monetary policy is expected to remain expansive, interest rates will stay at their historic lows and the
construction boom will continue uninterrupted. Financing conditions for companies will remain extremely favourable. Fiscal and social policy is expected to
provide expansive, pro-cyclical stimuli. Investment in new equipment will rise at
a faster pace, high production capacity utilisation rates will necessitate investment in replacements and expansion. In addition, construction investment will
continue to rise. Private consumption is expected to increase at the same pace
as real income. Thus, like last year, demand-side momentum should come from
the domestic economy and not from net exports. Although growth in exports will
rise, thanks to an improvement in the world economy, it will be outstripped by
growth in imports due to strong domestic economic dynamics. Overall real GDP
will increase by 2.0% this year and 2.2% in 2015.
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The labour market situation will cyclically continue to improve over the course of
this year. The drop in unemployment is forecast to be lower than the increase in
employment, since a growing number of German residents are in active employment and migration from EU member states is expected to remain high.
The unemployment rate will fall to 6.7% this year. In 2015 the situation in the
German labour market will be affected by the introduction of a nationwide minimum wage of 8.50 euros/hour. This will lead to a notable increase in labour
costs and will thus lead to job losses, especially in the field of so-called minijobs that are not subject to social insurance contributions. Due to the favourable
general economic trend, however, the situation in the labour market remains
stable, despite the dampening effects of the minimum wage, and the unemployment rate is expected to drop again to 6.6%. The negative impact of the
minimum wage will accumulate over several years, just as the full positive impact of the reduction in wage claims resulting from the Schröder reforms did not
emerge until several years after their implementation.
Consumer prices are expected to increase by 1.1% this year. The inflation rate
will rise to 1.7% in 2015. This primarily reflects developments in labour costs,
which are expected to increase significantly due to rising production capacity
utilisation and the introduction of a legal minimum wage.
The budget surplus of the German government will continue to grow over the
forecast horizon, partly because significant additional revenues from taxes and
social contributions can be expected due to the improving economic situation
and favourable developments in wages and salaries. A budget surplus of 0.5%
in relation to GDP is expected in 2014, and of around 0.7% in 2015. General
government gross debt looks set to fall considerably to around 70% by the end
of 2015.
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Key Forecast Figures 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
0,4
-0,8
-2,4
-0,2
3,0
0,7
0,9
1,5
0,4
1,3
0,8
5,0
7,4
3,8
3,1
2,6
4,6
6,2
2,0
1,8
1,2
5,8
10,0
3,3
5,0
2,4
6,2
7,2
2,2
41608
2897
41847
2950
42207
2898
42407
2858
6,8
6,9
6,7
6,6
2,0
1,5
1,1
1,7
2,8
1,9
1,6
2,3
- EUR billion
2,3
5,2
12,9
19,7
- in % of GDP
0,1
0,2
0,5
0,7
198,6
206,0
212,0
220,0
7,4
7,5
7,5
7,4
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)
General government financial balancef)
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 1995).
Source: Federal Statistical Office, Federal Employment Agency, Deutsche Bundesbank, 2014 and 2015: forecast by the Ifo Institu
For a detailed presentation of the economic forecast see T. Wollmershäuser, W.
Nierhaus, T. O. Berg, C. Breuer, C. Grimme, S. Henzel, A. Hristov, N. Hristov,
M. Kleemann, W. Meister, J. Plenk, C. Seiler, L. Wieland, K. Wohlrabe, A. Wolf:
ifo Konjunkturprognose 2014: Deutscher Aufschwung setzt sich fort, ifo
Schnelldienst, to be published.
The forecast can be accessed and downloaded at http://www.cesifogroup.de/prognose or requested via email to [email protected].
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Contact: Prof. Timo Wollmershäuser ([email protected], Tel. 089/92241406).
About the Ifo Institute
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
Europe's leading research institutes and is also the economic research institute most frequently cited in the German
media. Thanks to a cooperation agreement, Ifo enjoys close links with the Ludwig-Maximilians-University of Munich
(LMU); and in 2002 it gained the status of an "Institute at the University of Munich". Within the CESifo Group the Ifo
Institute cooperates very closely with the Center for Economic Studies (CES) and CESifo GmbH. CESifo is also the
brand name used to cover the international activities of the entire group.
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