The Results of the Joint Economic Forecast for Spring 2013 - Positive Signals for the German Economy

Thanks to an improved situation on financial markets and easing global economic headwinds, conditions are favourable for the German economy. This is the conclusion of the latest Joint Economic Forecast (Gemeinschaftsdiagnose), a biannual economic assessment issued by leading research institutes in the German-speaking world. Dr. Marcus Kappler, chief ZEW researcher involved in drafting the report, discusses the most important findings.

Dr. Marcus Kappler studied economics at the universities of Tübingen and Maryland (USA) and obtained his doctorate from Goethe University Frankfurt in 2007. He has been employed at ZEW since 2002, where he is deputy head of the Growth and Business Cycles research group. His research focuses on the accuracy of economic forecasts, on structural unemployment, and on the factors that influence potential output.

The report's authors project that German GDP will grow by 0.8% this year and by 1.9% next year.  What is driving the German economy?

Basic economic conditions have been quite favourable for some time, and this should provide additional momentum to the German economy over the course of the year. In particular, since the European Central Bank announced that it would – if necessary – make unlimited bond purchases from member states in crisis, fears that the eurozone might break up have diminished considerably. Thus, the situation in Europe is currently much more stable than it was last year, even if a lasting solution to the crisis in some member states is still a ways off. Investors are gaining confidence, a fact that has found expression first and foremost in surveys of economic sentiment. The low interest rate policy of the ECB is strongly stimulative in Germany, and should lead to considerable growth in investment activity in the period covered by the forecast. Internationally, German companies have rarely been so competitive – they have a particularly strong presence in emerging economies, which are the engines of global growth, and will profit in the future from emerging-market demand. In addition, the stability of the German labour market means favourable prospects for income growth. Accordingly, the German economy stands to benefit from higher consumer demand.

The research institutes that participated in drafting the report predict a balanced federal budget this year and a budget surplus of 0.5% in relation to GDP for 2014. Has Germany embarked upon a sustainable path for fiscal consolidation?

The budgetary situation in Germany has considerably improved. However, sustainable fiscal policy depends crucially on whether structurally balanced budgets can be maintained over the long term. A closer look at the current budget reveals a less rosy picture. Germany’s cyclically adjusted budget surpluses depend to a considerable extent on factors that are not sustainable. On the one hand, interest rates are at historic lows, and this lowers interest payments on government debt. On the other hand, bracket creep, i.e. the process by which inflation pushes wages into higher tax brackets, has led to flush government coffers, yet this additional revenue is based solely on inflationary effects, and not on higher real taxable income. Both of these factors are short term. In the not so distant future, German bond rates will likely climb, leading to higher interest payments. Furthermore, bracket creep has negative effects on labour and capital supply. This impairs potential output over the mid-term, thus leading to a lower tax base.

Numerous eurozone countries are still struggling with economic crisis and excessive public debt. What are the risks to the German economy?

The eurozone countries in crisis have ratified structural adjustments and reforms. However, their implementation will require patience and perseverance. Lack of commitment to consolidation or the abandonment of reform efforts could lead at any time to new turbulence, as demonstrated by the tremors caused by the elections in Italy and the banking crisis in Cyprus. However, there is a much lower probability of an intensification of the crisis similar to that witnessed last year, when the existence of the common currency hung in the balance.

Aside from risks, are there any other positive prospects for the German economy?

The spring forecast presents the most likely scenario for the development of the German economy. Clearly, positive or negative deviations from this forecast are possible should underlying assumptions change. Current economic conditions are quite favourable; the German economy could grow even stronger than that forecast in the baseline scenario. The 68% forecast interval for GDP growth this year extends from 0.1% to 1.5%.

About the Joint Economic Forecast

Twice a year, in the spring and autumn, a team of leading economic research institutes prepares a report on the state of the economy for Germany’s Federal Ministry of Economics and Technology. Known as the Joint Economic Forecast, or Gemeinschaftsdiagnose, it provides a short-term outlook for Germany, Europe, and the world as a whole,  in addition to offering economy policy recommendations and some medium-term projections. The current team consists of researchers from the following institutes:

• The Halle Institute for Economic Research (Halle)
• Kiel Economics (Kiel)
• The Ifo Institute for Economic Research (Munich)
• The KOF Swiss Economic Institute (Zurich)
• The Institute for the World Economy (Kiel)
• The Centre for European Economic Research (Mannheim)
• Rheinisch-Westfälisches Institut für Wirtschaftsforschung, or RWI (Essen)
• The Institute for Advanced Studies (Vienna)