2019.10.0205:47:00UTC+00Germany's Leading Economic Institutes Cuts GDP Growth Forecast

Germany's leading economic institutes slashed the economic growth forecast for this year and next, on Wednesday, mainly citing the weakening global demand for capital goods exports.

The growth forecast for this year was lowered to 0.5 percent from 0.8 percent and the outlook for next was slashed to 1.1 percent from 1.8 percent. "Reasons for the poor performance are the falling worldwide demand for capital goods - in the exporting of which the Germany economy is specialized - as well as political uncertainty and structural changes in the automotive industry," the think tanks said.

Meanwhile, monetary policy is trying to shore up macroeconomic expansion, the institutes observed. The Joint Economic Forecast is published twice a year on behalf of the German Federal Ministry of Economic Affairs and Energy. The DIW (Berlin), the ifo Institute (Munich), IfW (Kiel), IWH (Halle), and RWI (Essen) participated in producing the latest autumn report.

"German industry is in recession, and this is now also impacting the service providers catering to those companies," Claus Michelsen, Head of the Forecasting and Economic Policy Department at the host German Institute for Economic Research (DIW Berlin) said. Any modest expansion in the German economy, the biggest in the euro area, is being underpinned by household spending, Michelsen said. Good wage agreements, tax breaks, and the expansion of government transfers are boosting private household spending, the economist added. "Risks arising from an escalation of the trade war are particularly high," Michelsen said. "But a disorderly Brexit would also have costs: it would cause German gross domestic product, taken by itself, to be 0.4 percent lower in the coming year than if there was an orderly exit."

German employment was forecast to grow by 380,000 jobs this year. Only 120,000 and 160,000 new regular jobs are expected to be created in the next two years. The jobless rate was forecast to rise to 5.1 percent next year from 5 percent this year. Thereafter, it is expected to ease to 4.9 percent in 2021.

Inflation is expected to rise to 1.5 percent next year from 1.4 percent this year. In 2021, the figure is forecast to climb to 1.6 percent. The country's budget surplus is expected to be massive this year, at to around EUR 50 billion, but it is forecast to ease to EUR 4 billion by 2021. Various fiscal measures such as additional pension benefits, an increase in child benefit, income tax relief and not least the partial abolition of the solidarity surcharge are expected to help in reducing the fiscal surplus. Thus, monetary policy is delivering clear stimuli and supporting private consumption, the institutes said.