The German economy has recently suffered a noticeable setback and forecasts are currently being revised downwards in a consecutive row. While various economic indicators had already indicated a slowdown in growth momentum over large periods of the year, the real gross domestic product grew solidly in the first half of the year. In the third quarter, however, the economy then plummeted.
This was mainly due to the automotive industry, which had considerable problems with the certification of vehicles according to the new WLTP emissions test procedure. Allianz Research assumes that these problems in the automotive sector will be largely resolved by the end of the first quarter of 2019 at the latest, and anticipates a countermove to the slump in growth in the third quarter for both the current and the coming quarter.
However, uncertainty about future economic developments due to the protectionist U.S. trade policy and geopolitical risks remains considerable. Added to this is the uncertainty in Europe caused by Brexit and the difficult situation in Italy. Reason should, however, prevail and negotiations should help to avoid a noticeable escalation of conflicts.
All in all, Allianz anticipates that, despite the increased risks, overall economic capacity utilization in Germany will continue to increase in the coming year. However, with real GDP growth of 1.7 percent (2018: expected 1.5 percent), the rate of the previous years (2016 and 2017: 2.2 percent each) will no longer be reached.
"Despite the recent setback in Germany, the domestic economic environment suggests that the upswing will continue, albeit at a more moderate pace. This applies in particular to private consumption. The disposable incomes of private households will continue to grow quite strongly in nominal terms in 2019," said Michael Heise, Chief Economist at Allianz.
In 2018, too, the net balance of public finances is likely to have been higher than originally expected. Overall, Allianz expects a budget surplus of EUR 52.5 billion for 2018, which corresponds to 1.6 percent of German economic output. At 59.9 percent of gross domestic product, public debt is likely to have fallen below the 60 percent mark for the first time since 2001.
For the year 2019, strong expenditure growth in the region of 4½ percent is expected. This is essentially due to the pension policy measures already adopted as well as to investment measures and additional expenditure in the area of development aid. The degree of expansion of German fiscal policy will continue to increase in 2019. The budgetary impact of the fiscal policy measures adopted to date will be around 0.6 to 0.7 percent of GDP in 2019 (after 0.2 percent of GDP in the current year). The budget surplus will fall noticeably. With a forecast of 35.5 billion euros or 1 percent of GDP, however, it will remain substantial.
"Economic policy reforms are needed to keep the economy on course for growth in an increasingly difficult environment. The high budget surpluses of the public sector provide financial room for maneuver. The main problem is that the coalition agreement does not provide for tax cuts. In view of significantly reduced growth prospects, however, coalition members should not be deterred from necessary reforms. A tax policy that increases the net income of private households and makes Germany more attractive as an investment location will strengthen growth through higher private consumption and investment expenditure. What is good for Germany will also help our European partners, who urgently want stronger impulses from Germany," said Heise.