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German Economy to Gain Additional Momentum in 2016
January 25, 2016 | IHSEstimated reading time: 3 minutes
Private consumption, which has been fairly weak in Germany for most of the past 20 years, now benefits from fairly high real income growth by historical standards. Nominal wage growth of around 3 percent is accompanied by inflation at around 0.5 percent, with additional oil price declines since November 2015 ensuring that purchasing power will continue to gain at a healthy clip in 2016. Labor market conditions are the best in at least 25 years, employment levels have reached all-time highs and unemployment is still trending lower at present. Consumer confidence will thus remain high in the foreseeable future.
At the same time, investment in equipment that has been held back in recent years due to elevated uncertainty linked to the Eurozone debt crisis is expected to come more to the fore in 2016, and construction will pick up for the long-neglected (transport and IT) infrastructure and for housing – the latter not least due to the recently accelerating refugee influx.
Finally, public expenditures will increase much more strongly than during 2010-14, owing to the aforementioned requirements to boost infrastructure and to meet refugees’ subsistence, and subsequently job qualification, needs. The government has already indicated they are willing to use recent budget surpluses for these purposes and will not tighten fiscal policy elsewhere to compensate.
Political uncertainties related to managing the refugee crisis harbors the largest risk
The largest risk to this fairly positive outlook is linked to the refugee factor. This pertains not so much to the direct impact on the labor market – unemployment is likely to turn higher from about mid-2016 onwards as refugees with resident status enter the jobs market. However, employment should continue their ascent in any case – but to potentially unsettling political conflicts about measures to limit immigration.
On balance, IHS Global Insight remains confident that the government will find solutions that will prevent any severe disruptions to economic activity, such as violent clashes on the streets or goods transport being lastingly inhibited by strict border controls.
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