Despite the shadows cast by the soaring oil price, the German economy is currently performing better than expected. Following the second-quarter dip in growth, the economy has got back into stride. New orders in particular have been doing well, picking up across all sectors. This is being accompanied by a healthy trend in industrial production, up by 3 % on a year earlier, with corporate service providers benefiting in particular.
Private consumption will shake off stagnation in 2006. Disposable income is set to rise by 2.2 %. With the savings rate expected to remain constant, private consumption will probably increase by 1.0 %. In 2006 real fixed investment is likely to rebound modestly for the first time since 2000, although construction spending is likely to fall again by 1.0 %. Thanks to strong growth in profits the increase in real machinery and equipment investment will probably come in at just under 5 %. All this suggests that firms are back on the expansion track.
German economy to gather pace in 2006
Exports will remain an important mainstay of German economic growth next year as well. With the global economy still expanding, the improved competitiveness of German firms should ensure healthy export growth of 5.5 % real in 2006. However, with imports climbing by 4.5 %, the external contribution to growth will be slightly lower than this year. We see inflation next year at 1.5 %.
On the labor market the jobless total is expected to fall by 210,000 to 4.6m (unemployment rate: 11.4 %. The number of people in work will probably climb by 0.8 % next year, in line with around 310,000 new jobs.
All told, the current indicators point to somewhat stronger growth in the euro area in the second half of this year, with a further modest acceleration on the cards in 2006. We expect to see three interest rate hikes of 25 basis points each between next spring and the end of 2006.
In 2006 the will continue to benefit from an ongoing healthy expansion in world trade which is set to expand by 7 %. The emerging markets are increasingly becoming the engine of the world economy. Over three years they have notched up cumulative growth of more than 15 %.
To sum up, it can be established that the world economy has so far proved robust in the face of the rising oil price. The main reason is probably that monetary policy has been able to pursue a relatively expansionary course over a long period. But with interest rates now higher again, any further rise in the oil price would pose a substantial risk to the world economy.
Claudia Broyer
David F. Milleker
Christiane Seyffart
Dr. Rolf Schneider