Rising prices for important commodities and the correction on the property markets will apply the brakes to the world economy’s hitherto very strong growth momentum. Nonetheless, in 2008 the global economy as a whole should again turn in growth of more than 3 %, even though the American housing construction plight will persist for some time to come. Business activity has also cooled in the euro area. In the light of events since mid-year, we have revised our EMU growth forecast for 2008 down a tenth to 2.1 %.
Economic Forecast 2008: German economy in robust shape
Although the cyclical upswing in Germany continued in the opening half of 2007, it failed to match the previous year’s momentum. The increase in value added tax at the beginning of the year caused consumption to collapse in the first quarter of the year. And the development in construction spending was also on the disappointing side. The latest available economic indicators paint a mixed picture. On the one hand, order books in industry are still full to bursting, while on the other various sentiment indicators signal an at least temporary cooling in economic momentum.
Private consumer demand in the first quarter of 2007 went into a tailspin, down 1.8 % on the previous three months. But then it rebounded a little in the second quarter. Consumption is well placed to stage a further recovery, with the number of people in work this year looking set to rise 1.6 %. After taking time out for a breather in 2007, private consumption should turn into a driver of Germany’s economic expansion next year amid still positive developments on the labor market. All told, real private consumer spending should jump by 2.1 % in 2008. That would be its steepest rise since the boom year 2000.
The momentum the recovery on the labor market has now reached is highlighted by the annual average figures: on average in 2007 39.74 million people will be in work, a good 650,000 more than a year earlier. With an increase of 0.9 % the buildup in employment is likely to continue in 2008 at a somewhat more subdued pace.
The vigorous upswing in machinery and equipment investment continued in the first half of 2007. Overall, the economists expect an increase in machinery and equipment investment of 10.3 % real in 2007. However, the boom in investment is likely to have peaked this year. In 2008 growth is likely to slip appreciably to 5.7 %.
In 2008 German foreign trade will once again record weaker growth. The somewhat cloudier world economic outlook and the related weaker expansion in world trade, coupled with the ongoing strength of the euro throughout the year, will all exert a significant drag. All told, we expect real export growth of 5 %. This means that exports will grow more slowly than imports which are set to increase by 5.7 %. After a substantial contribution to growth of around 1 % this year, it is thus likely to be practically negligible in 2008.
So far this year inflation has been fairly moderate. In the first nine months consumer prices rose by 1.9 % on a year earlier. The fact that prices have not risen substantially more strongly is due not least to the appreciation of the euro against the US dollar. However, inflation has picked up appreciably of late due mainly to high oil and food prices. In September the annual rate climbed to 2.5 %. Inflation is expected to average 2 % in 2007. At 1.7 % in 2008 it is likely to drop back comfortably below the critical 2 % mark.