The Strategist

Germany: Economic growth without government

12/27/2017 - 09:58

It's surprising, but true: the German economy is growing and, seemingly, will grow further. Experts raised the forecast of the GDP growth rate in Germany in 2017-2018.

szeke via flickr
szeke via flickr
Experts are unanimous: Germany is experiencing an economic boom, and in 2018 it will increase. Immediately several large German analytical centers and economic institutions raised their official forecasts of GDP growth in the middle of December both for the outgoing year 2017 and for the upcoming. It is noteworthy that this was done against the background of the government crisis in Berlin and a number of unfavorable external factors. These include, first and foremost, Brexit, the protectionist tendencies in the US and the slowdown in China.

The German Institute for Economic Research (DIW) in Berlin is somewhat more reserved: it raised the forecast for both years to 2.2%. Nevertheless, its experts, just like their counterparts from other institutions, use the word Hochkonjunktur in their report and even put it in their headline. The word can be translated as "the highest stage of the conjuncture cycle", "high conjuncture" or simply "boom".

For Germany, with its highly developed economy and a saturated domestic market, annual growth rates of 2.2-2.5% are considered not only very good - they are almost on the verge of overheating the economy.

The fact that the German economy is now growing rapidly is associated with a favorable, moreover, optimal combination of a number of internal and external factors. All German experts point it out in their studies (warning, at the same time, that it will not continue without reforms).

The research emphasizes that Germany's economic boom is now being supported simultaneously by growing export of German products, which is especially fueled by the economic recovery of the euro zone countries, and a boom in the domestic market caused by record employment and real disposable income growth. The investment activity of enterprises, rapid construction and a record surplus of the state budget are also contributing to a steady rise.

And what about the government crisis? After the elections on September 24, Angela Merkel has still not managed to form a government coalition; therefore both the chancellor and the ministers are now only in temporary positions, not having a program of reforms approved by the parliament.

However, it is striking that studies of economic institutions give surprisingly little attention to this topic, especially against the backdrop of a detailed analysis of numerous macroeconomic data. The scientists' conclusion is unambiguous: difficulties with the formation of the government do not interfere with the country's forward movement, since they do not cause fears that the political course or framework conditions for business will radically change in Germany.

The DIW Institute suggests that after the formation of the government or even re-elections, the forecasts for 2018 and 2019 will have to be revised again, since any new ruling coalition, regardless of its political composition, will certainly use a significant budget surplus to either lower taxes or increase government spending. Both can give a significant additional impetus to the economy.