World Economy

German Growth Forecast Cut

German Growth Forecast CutGerman Growth Forecast Cut

Germany’s top economic research institutes have revised downwards their forecast for the nation’s growth, citing a cooling of the world economy. They also say government policies are doing little to promote growth.

Germany’s four leading economic research think tanks said on Thursday they now expect the nation’s economy to grow by 1.6% in 2016, instead of 1.8% as forecast in autumn 2015, DW reported.

“The revision was entirely due to the marked cooldown in the world economy at the end of 2015,” said Timo Wollmershauser, interim director of the Ifo Center for Business Cycle Analysis and Surveys. “Germany’s domestic economy is even stronger today than it was last autumn,” he added.

In their joint annual spring economic forecast, research groups DIW, Ifo, IWH and RWI said that growth was being driven primarily by robust private consumption.

Researchers said domestic demand in Germany would remain strong due to continued employment growth, substantial raises in wages and improving purchasing power on the back of lower energy prices. Low interest rates are also boosting demand, they pointed out.

Increased spending by the government to cope with the huge influx of migrants and refugees into the country over the past year is also expected to fuel economic expansion in 2016 and 2017, the institutes noted.

The additional expenditure on refugees, however, would lead to a reduction in the government’s budget surplus, the think tanks said.

“Expenditure related to the inflow of refugees will rise and fiscal policy will be slightly expansive. Thanks to a marked increase in income tax revenues, taxes from revenues and social contributions and lower spending on interest, the German federal government will nevertheless post a budget surplus of €11 billion ($12.4 billion) this year and €10 billion in 2017,” they estimated.

The German labor market, the research groups said, would continue to improve in the coming months, underlining that the labor force would grow by 500,000 on average this year and by 390,000 in 2017.

Nevertheless, the availability of refugees in the labor market would push up the unemployment rate, they warned. “However, the average unemployment rate of 6.2% this year and 6.4% in 2017 will remain almost unchanged.”

Meanwhile, on the investment front, activity would remain subdued, the experts said.