RWI Konjunkturberichte

The German economy has slowed down noticeably in the course of 2012 and GDP growth turned negative in Q4. Private investment has declined throughout the year, as businesses cut spending in response to the growing uncertainty. Consumption, however, remained robust. Net exports also contributed positively to GDP growth, which was, however, due to declining imports rather than strong exports. Recent economic indicators display a mixed picture. Business sentiment and expectations have substantially improved in recent months and positive signals also arise from the labor market. On the other hand, industrial production has been merely stagnating and incoming orders even declined in January. We therefore predict GDP to grow only by 0.2% in Q1. We expect stronger growth in Q2, due to catch-up effects, as production growth in Q1 has likely been dampened by extraordinary cold weather. The upswing is expected to continue in the course of the year. Strong income growth should boost both consumption and investment in the housing sector. As uncertainty eases, businesses are expected to increase spending as well. Net-exports are unlikely to be a major contributor, as import growth driven by strong domestic demand should offset exports accelerating as the world economy recovers. In summary, we expect GDP in 2013 to grow by 0.6%. Next year, economic conditions should improve further. Financing conditions are likely to remain favorable. Exports, boosted by a stronger world economy, will stimulate investment and as employment increases, income growth and consumer spending will remain strong as well. All this should result in GDP expanding by 2.1% in 2014. Inflation will likely remain modest. The oil price in Euro is below last year’s value and rising labor costs are compensated by increases in productivity. In the course of 2014 inflation should increase somewhat, due to higher capacity utilization and higher rents as real estate prices rise. Inflation rates will average 1.6% this year and 2.0% in 2014. Production growth will lead to higher labor demand. Employment is therefore expected to increase by 0.4% this year and by 0.6% in 2014. As a result, unemployment will decline, though not as rapidly, since rising immigration will increase labor supply, offsetting negative effects resulting from the shrinking domestic population. The unemployment rate is forecasted to remain at 6.8% this year and to drop to 6.4% in 2014. After having achieved a surplus in 2012, the public budget will slightly deteriorate this year, because fiscal stance has been loosened and the weaker economy will have a dampening effect on revenues. We expect a deficit of € 6 bn. or 0.2% of GDP this year, but as the economy improves in 2014, a budget surplus of € 10 bn. or 0.4% of GDP should be reached again, unless fiscal policy is further loosened.

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