Germany outlook brightens despite global risks: think-tanks

Germany's leading economic institutes upgrade their forecasts for growth this year and next year (AFP Photo/)

Berlin (AFP) - The outlook for the German economy, Europe's biggest, is looking brighter this year and next as robust consumer demand offsets external risks, the country's five leading economic institutes said Wednesday.

"The German economy is already in the fifth year of a moderate upturn," the think-tanks -- Ifo, RWI, DIW, IWH and IfW -- wrote in their annual spring report.

They upgraded their forecasts for gross domestic product, with growth now seen at 1.5 percent in 2017 and 1.8 percent in 2018.

Previously, the institutes had been pencilling in GDP growth of 1.4 percent and 1.6 percent this year and next year after the German economy expanded by 1.7 percent in 2015 and by 1.9 percent in 2016.

The relative slowdown from those levels this year was solely attributable to the smaller number of working days, the experts said.

Nevertheless, "cyclical dynamics remain low compared to earlier periods of economic recoveries," the report cautioned.

"This is primarily due to the fact that the recovery has so far been more strongly driven by the expansion of consumption expenditures, which show lower cyclical fluctuations compared to investment expenditures and foreign trade," the institutes explained.

In past years, Germany's economic motor has traditionally been driven by the strength of its exports.

But while exports remain strong, imports have also shifted into higher gear thanks to robust household and public-sector spending.

A number of far-reaching economic and labour market reforms implemented by previous administrations have helped bring down unemployment.

And the jobless rate is expected to continue to decline, the institutes predicted.

"Unemployment is expected to fall to 6.1 percent in 2016, to 5.7 percent in 2017 and 5.4 percent in 2018," the deputy president of one of the think-tanks, IWH's Oliver Holtemoeller, said.

At the same time, inflation was expected to "increase markedly over the forecast horizon", he said.

"After an increase in consumer prices of only 0.5 percent in 2016, the inflation rate is expected to rise to 1.8 percent in 2017 and 1.7 percent in 2018."

Germany's economic performance has also helped the country get its public finances back in the black and they look unlikely to deteriorate much in the coming years, the institutes said.

"The public budget surplus will reduce only modestly. Public finances are slightly stimulating economic activity in the current year and are cyclically neutral in the year ahead," the report said.

Nevertheless, external risks persisted, the institutes pointed out, saying it was difficult to predict the economic impact of Brexit and the uncertainties connected with the policies of the new US president Donald Trump.

IWH's Holtemoeller said that while US policies could weaken the euro -- which would be positive for exports -- potential protectionist measures on the other side of the Atlantic could constitute a risk for Germany.