RWI: German economy is losing steam

The RWI – Leibniz Institute for Economic Research is lowering its forecast for German economic growth slightly to 0.8 percent this year and 1.4 percent next year. The higher rate for 2020 is mainly due to significantly more working days. The unemployment rate will decline only slightly to 5 percent this year and 4.9 percent in the coming year. The inflation rate is expected to remain moderate at 1.3 percent this year and 1.4 percent next year. Public budgets are expected to reach surpluses of 42 and just under € 32 billion in 2019 and 2020, respectively. The drop is due to a significantly lower increase in government revenues and noticeably higher monetary benefits.

The most important results:

The RWI lowers its forecast of German economic growth for 2019 compared to March of this year slightly from 0.9 to 0.8 percent. For 2020, it expects 1.4 instead of 1.5 percent. The higher rate for 2020 is mainly due to significantly more working days.

The expansion is likely to be driven by domestic use, in particular private consumption and construction investment. Both are expected to continue to benefit from strong income growth. Construction investment will also be stimulated by increased demand for housing and the continued low cost of housing loans.

The investment activity of companies is in conflict with opposing factors. The continued low financing costs, the still high capacity utilization and the investments in digitization are having a stimulating effect. The uncertainty about the economic and trade policy framework has a dampening effect. As a result, companies are likely to be cautious about larger investment projects, and investment in equipment is likely to expand only slightly.

Employment momentum seems to be easing in the labor market. Thus, the number of registered vacancies has tended to fall since October 2018. In addition, the decline in temporary agency work and the increase in the number of registered unemployed in May are likely to be accompanied by changes in legislation and coverage as well as economic factors. Against this background, the unemployment rate is expected to fall only slightly to 5.0 percent in this year and 4.9 percent in the coming year.

Inflation is expected to remain moderate at 1.3 percent this year and 1.4 percent next year. Falling energy prices have a dampening effect. However, core inflation (prices excluding energy) will rise slightly to 1.4 percent in the forecast period, as production costs, which have risen comparatively markedly in recent quarters, are increasingly being passed on to consumers.

The state budget surplus is expected to fall to 42 billion euros this year and to almost 32 billion euros in 2020. The government’s surplus ratio is expected to fall to 1.2 percent of GDP this year and 0.9 percent next year. The reason is that, on the one hand, a significantly lower increase in government revenues is to be expected and, on the other hand, that monetary social benefits are significantly expanded.

Commenting on the current state of the German economy, RWI Chief Economist Roland Döhrn says: “There are increasing signs that the growth of the German economy is slowing down. This is suggested, among other things, by lower order intake in the industry and a weaker job creation in the labor market. “

Source: RWI