Development of the German economy: Upswing remains stable

The German economy markedly slowed down in spring. While the contraction in the second quarter was partly a result of unusual mild weather conditions in the first quarter of 2014, also underlying dynamics have lost momentum. The external sector in particular dampened the economic upturn.

We expect an only subdued output expansion in the short run since incoming orders did not grow in the second quarter and sentiment indicators have declined. Nevertheless, the output contraction in the second quarter does not indicate the beginning of a recession. Economic indicators were unexpectedly positive in July. Furthermore, employment is steadily increasing, unemployment remains at a low level and the number of vacancies is rising.

In addition, fiscal policy measures slightly stimulate the economy and monetary policy is likely to remain expansionary. As a result, the economic upswing will continue and accelerate during the next year. Domestic demand is likely to be the driving force of this upturn. Favorable conditions on the labor market will considerably raise wages and lead to an expansion of private consumption.

Further, social benefits will increase in 2015. The upsurge in disposable income and favorable financing conditions will promote investment in housing construction. Corporate investment will significantly grow in the light of expanding capacity utilization and low interest rates. The external sector is not likely to contribute to the economic upswing. Imports will benefit from the substantial rise in domestic demand and hence expand more strongly than exports.

We expect the German GDP to increase by 1.5 percent in 2014 and by 1.8 percent in 2015. Despite economic growth and rising employment the decline in unemployment is likely to be small. The unemployment rate will be 6.6 percent in 2015. The implementation of statutory minimum wages is likely to negatively affect the upturn on the labor market. Additionally, the increase in employment will continue to originate mainly from the hidden reserve and immigration.

Price increases will be low in the short run, but they will accelerate due to enhanced capacity utilization. We expect an inflation rate of 1.0 percent for this year and 1.6 percent for next year. Despite fiscal policy being slightly expansive, the public budget is likely to improve since the economic upswing and bracket creep will considerably raise tax revenues. The public budget surplus will amount to € 12 bn (0.4 percent of GDP) in 2014 and to € 13 bn (0.5 percent of GDP) in 2015.

Moderate expansion of the world economy

Expansion of the global economy has slowed down during the first half of 2014. In many countries special factors have been the driving force. Output grew only at a slower rate in emerging countries and it lost momentum in advanced economies. Geopolitical conflicts that have emerged or exacerbated in 2014 have not yet considerably influenced economic dynamics. On the contrary, in many countries stock prices are almost quoting at former highs. In addition, prices of commodities such as crude oil or gold have not substantially risen like they did during previous times of uncertainty. The price of oil has even decreased in the last few months.

We expect most of the special factors that have prevailed in the first half of this year to subside so that cyclical dynamics will predominate during the remainder of the year. We thus expect economic dynamics in the industrialized economies to accelerate in the second half of this year. In contrast, output in emerging countries is likely to further slow down. If current geopolitical crises do not deteriorate, the expansion of the global economy should gradually accelerate, leading to a moderately paced upswing.

We expect world output to grow by 3.3 percent this year and by 3.8 percent next year. This will lead to an increase of international trade in goods by 3.3% in 2014 and 5.3% in 2015.

Though international conflicts have not yet harmed economic dynamics, they pose a threat to the global economic upswing. A deterioration of the Russia-Ukraine conflict would have significant effects on worldwide economies, particularly those in Europe. Similarly, battles in Iraq and Syria could harm global economic activity if they obstruct oil production. Furthermore, crises in the Euro area have not yet been fully overcome and may flare up again.

Key Data of the Forecast for Germany from September 2014
2013 to 2015

RWI calculations based on data provided by the German Statistical Office, Deutsche Bundesbank, and the Federal Labor Office. - ¹In real terms. - ²Domestic. - ³National definition. - ⁴In % of civilian labor force. - ⁵Compensation per employee divided by real GDP per employed person. -  ⁶National Accounts definition. - ⁷Balance of payment definition. - ^fForecast.

Key Data of the International Forecast
2013 to 2015; changes over the previous year in %

RWI calculations based on OECD, IMF, Eurostat and national data. - ¹In constant prices. -²Weighted average of the countries forecasted in this report. -³Goods, in prices and exchange rates of 2005. - ⁴Annual averages.- ^fForecast.