Economic forecast 2014/2015

The German economy got off to a buoyant start to 2014. Industrial orders and production in January and February were well up on the corresponding level a year earlier. Retail sales in the first two months of the year were up markedly on late 2013 levels, exports and imports also rose substantially in January. The unemployment picture was also appreciably brighter than normal at the start of the year. This confirms our upbeat forecast for the German economy that we have been championing since mid-2013.

“Driving the good start to the year is the fact that, after exports, consumption and construction, business investment is now also picking up,” said Michael Heise, Chief Economist at Allianz. Despite the geopolitical risks, the auspicious backdrop for the German economy – favorable financing conditions, real income gains thanks to low inflation, sizeable jobs growth and the pickup in the eurozone economy – should remain in place for the time being. Both exports and the domestic economy will provide a positive impulse throughout the year. All told, we are forecasting average growth in the German economy of 2.0% in 2014.


“This means that the German economy is likely to enter 2015 running slightly above average capacity. However, economic momentum is likely to weaken in the course 2015,” according to Heise. The introduction of the minimum wage, the 2014 pension package, the costs of the energy transition, a return to somewhat higher inflation rates and the likely leveling off in export momentum will all weigh on the economic outlook. Against this backdrop, we are penciling in growth in gross domestic product of only 1.6 percent in 2015. Unemployment, which will drop appreciably in 2014, will probably not fall further in the course of 2015.


In 2014 a further pickup in consumer demand is on the cards as earnings growth looks set to accelerate. In 2014 we are expecting an increase in disposable income of 3.1 percent and even 3.4 percent in 2015. With inflation likely to be moderate at 1.4 percent this year and 1.8 percent next year, we are likely to see real income increases of a good 1.5 percent in both 2014 and 2015. This provides the basis for higher growth in real private consumption than in the past two years.


The weakness in investment over the past several years continues to weigh on the German economy. However, the decline in investment activity now appears to have been halted. For three quarters now (seasonally adjusted) equipment investment has been rising again. Nonetheless, on average in 2013 equipment investment again slipped by 2.4 percent. Rising capacity utilization, very favorable financing conditions and healthy corporate earnings all argue for a further recovery in investment activity. Business surveys are also signaling positive business expectations and a markedly brighter assessment of the business situation.


“The let-up in the European sovereign debt crisis has removed much of the uncertainty about the economic outlook. To what extent the Russia/Ukraine crisis will spawn new uncertainty, which might undermine the propensity to invest, is at present still difficult to gauge. In the event of no further major escalation, the likely scenario in our view, we see only a very limited impact on overall investment activity,” explained Heise. We are therefore expecting a marked expansion in equipment investment of 5.6 percent this year, followed by 4.6 percent next year. Nonetheless, at 6.8 percent at the end of 2015 the share of equipment investment in GDP will still be marginally below the average since the year 2000 (7.2 percent). “Despite the recent upward trend, the weakness in investment has still not been overcome,” Heise stressed.


The positive trend on the German labor market seen in recent years continued at the beginning of this year. In January 2014 the seasonally adjusted number of people in work topped 42 million for the first time. In February 2014 the number of people in work was 315,000 up on a year earlier, an increase of 0.8 percent. This positive trend looks set to continue in the course of 2014. The jobless total is likely to fall by almost 150,000 over the year, on average we expect to see a decline of almost 90,000 to 2.86 million. In absolute terms the increase in employment will again substantially exceed the decline in unemployment as immigration levels are likely to remain high. We expect employment to increase by a good 300,000 both over the course of the year as well as on average in 2014.


In 2015 the outlook for the labor market is less rosy than this year. Apart from the less favorable overall backdrop, the introduction of the minimum wage is likely to curb jobs growth appreciably. And the number of jobs in the low-wage sector is actually likely to fall. In the course of 2015 we expect to see job gains of only 100,000, around 200,000 fewer than in 2014. The jobless total is likely to stagnate in the course of 2015, leaving around 2.8 million people without work on average.

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