Economy as a Whole: The Economic Expansion Will Continue to Stabilize

After German economic performance remained strong in the third quarter of 2017, the economic indicators suggest that the growth trend is set to continue. This has prompted the Kiel Institute for the World Economy (IfW) to lift the GDP growth rate for 2017 to an expected 2.0% (previously 1.7%).

Investments and exports are gradually becoming the main pillars propping up the upswing. Corporate investment, for example, is expected to increase on the back of very favorable sales and earnings prospects, especially now that the negative factors resulting from the uncertain international environment would appear to be gradually petering out. In addition, construction investments are expected to continue to grow at a rapid pace due to the very stimulating overall environment, which includes, not least, exceptionally favorable financing conditions.

Given the ongoing rise in the GfK consumer climate, which is currently at an all-time high, private consumption is also likely to remain one of the driving forces behind the German economy. This means that economic output in Germany is expected to continue to show dynamic development in the fourth quarter of 2017, even though the growth rate could dip slightly. This theory is supported by the recent appreciation in the euro, which makes exports to non-EMU countries more expensive and, as a result, less attractive, as well as by the mounting geopolitical risks – in particular the escalation of the conflict with North Korea – and the associated greater uncertainty. The relatively low oil prices, the favorable interest rate landscape and the acceleration in the global economy – particularly in the eurozone, Germany’s main trading partner, which is picking up speed – will also provide support a continued upswing.

Looking ahead to 2018, the IfW expects to see a further acceleration in economic momentum and is now predicting GDP growth of 2.2% (previously 2.0%). This forecast is supported by the fact that the expansion forces in the domestic economy remain strong, with the monetary environment expected to continue to provide considerable stimulus. In addition, the outlook for exports is expected to improve further as global economy recovers.

The IfW believes that the downside risks associated with increasing overutilization are becoming slightly less prominent overall. This is due to the most recent economic policy experience and decisions, such as the fact that a major transatlantic trade conflict is now looking less likely or, in particular, the fact that the French have formed a government that will not call the EU’s survival into question politically. Nevertheless, there are still upcoming parliamentary elections in Italy, while the North Korea conflict continues to threaten the stability of the international order, putting pressure on the environment for global economic activities at the same time. It also remains to be seen to what extent the European Central Bank will be able to stick to its ultra-expansive zero interest rate policy. The forecasts, however, suggest that the general domestic economic trend will remain on a strong upward trajectory, making the prospect of a cyclical slump extremely unlikely at the moment.