Germany is experiencing a strong economic upswing. This is a key finding of the Joint Economic Forecast released by Germany’s leading economic research institutes. ZEW is a contributor to the forecast, which is prepared on behalf of the German government. Dr. Marcus Kappler, who heads up ZEW's involvement in the Joint Economic Forecast, explains the forecast's findings.

Following his economics studies in Tübingen, Maryland (USA) and Berlin, Dr. Marcus Kappler obtained his doctorate in 2007 from Goethe University in Frankfurt am Main. Since 2002, Kappler has been employed at ZEW as the deputy director of the research group Growth and Business Cycles. His research focuses in particular on the reliability of business cycle forecasts, structural unemployment, and factors that influence production potentials.

Leading research institutes anticipate that German GDP will grow by 2.8 per cent during the current year and by 2.0 per cent in 2012. What is driving the German economy?

The German economy has made an astonishingly rapid recovery from the Great Recession of 2009, unlike many other industrial nations. Since the beginning of the year, Germany has been in the midst of a major upswing that has been fuelled by both foreign and domestic demand. Foreign sales by German firms have increased noticeably, as the world economy has been in an upturn, particularly due to the rapid recovery in emerging economies. Domestically, low interest rates are stimulating investment activity, particularly in private residential construction. Positive growth in employment along with rising wages will lead to increased private consumer spending. In the coming period we will likely see a shift in momentum toward domestic demand, with somewhat weaker growth in foreign sales, as rising unit labour costs will affect international competitiveness.

Several nations in the eurozone remain in the midst of a debt crisis. In addition, there are risks to the availability of raw materials due to the complex situation in the Arabian region. What other risks do you foresee for the German economy?

First of all, significant risks to global recovery will continue to emanate from those nations in which the financial and economic crisis revealed major structural problems. The US needs to get its debt problem under control. Markets have already been responding anxiously to high US budget deficits and rising debt levels. The debt situation in the peripheral nations of the eurozone remains explosive. There has been talk of restructuring Greek sovereign debt, with a haircut for bondholders. Portugal needs to receive assistance from the European financial safety net and obtain emergency loans. Should the situation in North Africa flare up further or be extended to other oil-exporting nations, an oil supply shock could severely jeopardise the economies of oil importers, especially nations in a weak recovery.

Aside from the risks, are there additional opportunities for the German economy?

One can imagine scenarios that would favour stronger expansion of the German economy than those assumed in the projections. Interest rates, for example, remain at a historically low level in many countries. However, we lack sufficient experience to know precisely what effects this might have in a highly integrated global economy. For Germany in particular, it has been a long time since monetary conditions have been as favourable as they are today.

According to the Joint Economic Forecast for this year, Germany will once again remain under the deficit threshold of three per cent GDP. Is Germany now on a sustainable consolidation path?

In order to bring debt creation under control, Germany incorporated a so-called “debt brake” into its constitution in 2009. And this year, financial policy makers introduced a programme of budgetary consolidation. This is an important and necessary step for adhering to the requirements of the debt brake – particularly as in 2010, Germany’s national debt level had already reached the high level of 83 per cent of GDP. In addition, this is a very propitious moment for introducing budgetary consolidation. The positive economic situation is generating additional tax revenues for the government, and these must now be used to assure the long-term sustainability of the national debt.

The Joint Economic Forecast

The Joint Economic Forecast, which is released each spring and autumn on behalf of Germany’s Federal Ministry of Economics and Technology, provides a basis of reference for the German government’s economic growth projections. It contains analysis and predictions on the short-term economic situation in Germany, the eurozone, and throughout the world, and offers economic policy recommendations. A medium-term projection is a regular part of each Joint Economic Forecast. The following research institutes will be involved in the preparation of the Joint Economic Forecast up to the spring of 2013:

  • Ifo Institute for Economic Research at the University of Munich, in cooperation with the KOF Swiss Economics Institute at ETH Zurich,
  • Kiel Institute for the World Economy at Kiel University in cooperation with the Centre for European Economic Research (ZEW) in Mannheim,
  • The Halle Institute for Economic Research in cooperation with Kiel Economics, and
  • RWI (Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Essen) in cooperation with Institute for Advanced Studies, Vienna.

Date

23.05.2011

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