World Economy

Germany Not So Invulnerable After All

Germany Not So Invulnerable After AllGermany Not So Invulnerable After All

Germany’s economy is only superficially robust, hiding vulnerabilities to global economic conditions, according to a business survey from a leading German institute published Monday.

“At a first glance, Germany’s economy is doing quite well...but economic problems in the emerging economies and rising energy prices threaten to slow down growth,” the business-funded IW economic institute said, MarketWatch reported.

Germany’s traditionally strong export sector, the report said, is weakening partly because of the uncertain situation in emerging economies.

“In addition, unit labor costs in the industry are rising, which are therefore reducing companies’ competitiveness,” it added.

The institute reaffirmed its forecast for German economic growth of 1.5% for this year, which is roughly in line with recent forecasts by other institutes but more pessimistic than the 1.7% forecast by the German government. For next year, IW predicted growth of around 1.25%, while the government’s own forecast was higher at 1.5%.

“The German economy is vulnerable, its dynamic is at risk,” said IW Director Michael Huether.

IW’s poll of almost 3,000 companies showed that 39.9% of German businesses expect their output to rise this year, compared with 37.6% who forecast growth in a previous poll conducted in the fall.

  Firms Less Optimistic

The share of those expecting their output to shrink went to 15.2% up from 14.2% who were skeptical in the previous survey.

Companies’ optimism for exports is also in retreat, with 15% seeing exports shrinking, up from 12% previously, while 27% predicted growth compared with 26% in the fall.

“The slowing of the global economy’s growth dynamic leaves a clear mark on German companies’ export expectations,” Huether said.

The institute forecasts German export growth to slow to 2.25% in 2016, after a 5.4% increase last year, and to grow by 3% in 2017.

Germany’s economy, which for years has relied strongly on exports, can compensate the weaker exports by continuing strong private consumption caused by high employment levels and strong public consumption resulting from spending relating to the housing of roughly one million migrants who arrived in Germany last year, it said.

Efforts to provide housing and integration for migrants will cost a combined €50 billion ($56.3 billion) this year and next, IW said.

These costs combined with rising expenditure for state pensions mean the German government doesn’t have leeway to offer higher pensions for those less well-off, as planned by some government members, the report warned.