Germany: Economy continues to cool down - industry in recession

by David Fleschen

The leading German economic research institutes have significantly revised their economic forecast for Germany downwards. In the spring, they had expected a 0.8% increase in gross domestic product in 2019, but now they expect only 0.5%. Reasons for the weak development are the decreasing global demand for capital goods, whose export is specialized in the German economy, political uncertainty and structural changes in the automotive industry. By contrast, fiscal policy supports macroeconomic expansion. For the coming year, the economic researchers also lowered their forecast to 1.1%, after still 1.8% in the spring.

"German industry is in recession, which is now also affecting service providers close to the business," says Claus Michelsen, Head of the Economic Policy Department of the host institute for economic research (DIW Berlin). "The fact that the economy is still expanding is mainly due to the continuing buoyancy of private households, which is supported by good wage settlements, tax breaks and expansion of state transfers."

Worldwide, the political imponderables remain and burden foreign trade through the willingness of companies to invest. "Above all, the risks arising from an escalation of the trade conflict are high. But also an unregulated Brexit would have costs: The

Gross domestic product in Germany by itself would be 0.4% lower in the coming year than in a regulated exit, "added Michelsen.

Employment growth is slowing as a result of the economic slowdown; The industry has even recently cut jobs. By contrast, service providers and the construction industry are continuing to decline. This year, therefore, the institutes expect an employment increase of 380,000 jobs. In the next two years, only 120,000 or 160,000 new regular employment contracts are expected to be created. The unemployment rate will rise to 5.1% in 2020, from 5.0% in 2019, and then fall again to 4.9% in 2021. Consumer prices will continue to increase only modestly by 1.4% in 2019, 1.5% in 2020 and 1.6% in 2021. The surpluses of the state are still considerable this year with probably about 50 billion euros. However, they will melt to about 4 billion euros by 2021.

In addition to the economic slowdown, this is mainly due to various fiscal measures such as increased pension insurance benefits, increase in child benefits, relief from income tax and, not least, the partial abolition of the solidarity surcharge. They amount to around € 22 billion this year, to € 18 billion next year and to € 23 billion in 2021. Thus, the financial policy provides clear impetus and supports private consumption.

Since the spring, however, the risks to the German and global economy have worsened. The trade disputes between the US and China, but also intra-Asian conflicts, fuel uncertainty and put pressure on the international economy. An unregulated Brexit should also weigh on the European economy and especially on the German economy. In addition, processes of structural change in vehicle construction pose risks to the important automotive market in this country.

The joint diagnosis is prepared by the DIW in Berlin, the Ifo Institute in Munich, the IfW in Kiel, the IWH in Halle and the RWI in Essen.
Source: RWI Essen, Photo: Fotolia

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