Joint Diagnosis Germany # 2-2017 – Upswing Still Strong – Tensions Are Increasing

The upturn in the German economy has gained strength and breadth. In addition to consumer spending, foreign business and investments are now also contributing to the expansion. The very high economic momentum in the first half of the year will weaken somewhat. Nevertheless, economic output will grow faster than production capacity in 2017 and 2018. As a result, overall economic capacity utilisation will rise and economic output will exceed production potential. Gross domestic product is expected to rise by 1.9 percent in 2017 and 2 percent in 2018 (adjusted for calendar effects: +2.2 percent and +2.1 percent, respectively). Unemployment continues to recede, falling to 5.7 percent in 2017 and 5.5 percent in 2018 (after 6.1 percent in 2016). However, employment growth will slow down. The inflation rate will rise significantly, as crude oil prices will no longer fall; domestic price pressure will also become increasingly noticeable. The inflation rate of 1.7 percent in 2017 and 2018 will therefore be noticeably higher than in 2016, when consumer prices rose by only 0.5 percent. Public households are generating noticeable surpluses that are not only cyclical. If the next federal government uses the leeway resulting from structural budget surpluses to cut taxes or increase spending, fiscal policy would be expansionary not only in 2017 but also in the further forecast period, otherwise it would have a roughly neutral effect from 2018.