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1KOOTHS | German Economy at Full Steam
German Economy at Full Steam
IHS Markit | Frankfurt/Main, 6th February 2018New Year’s Briefing
Stefan KoothsForecasting Center
2KOOTHS | German Economy at Full Steam
Environment
GDP growth in export markets» 2017: +3.0 %» 2018: +2.8 %» 2019: +2.5 %
Financing cost remain extremely low (ECB rate on MRO)» 2017: 0.0 %» 2018: 0.0 % (end of new QE-purchases)» 2019: 0.1 % (long-term government bonds rates: 1 percent)
Fiscal policy almost neutral in status quo scenario (GDP impulse)» 2017: +0.4 %» 2018: +0.2 %» 2019: +0.1 %
3KOOTHS | German Economy at Full Steam
The big picture: Drifting towards overheating
Stretched upswing (5+ years) continues
“Chewing-gum cycle”
Diagnosis (end of 2017)» Production clearly above potential output
» Increasing bottlenecks (Labor market, construction)
» Business climate at record high levels
Output gap widens further
Temporary potential growth push (demographics) contrast to medium-term outlook
-5
-4
-3
-2
-1
0
1
2
3
4
5
1900
2100
2300
2500
2700
2900
3100
1991 1994 1997 2000 2003 2006 2009 2012 2015 2018
Output gap (rhs) GDP Potential output
Annual data; GDP, Potential output: price adjusted (chained volumes, reference year 2010).
Bn. Euro Percent
Production and potential output
fore
ca
st
4KOOTHS | German Economy at Full Steam
Capacity utilization: Up five years in a row
-10
-8
-6
-4
-2
0
2
4
6
8
10
79
80
81
82
83
84
85
86
87
88
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
2012 2013 2014 2015 2016 2017
Order-capacity-index
(rhs)
Capacity utilization
Quarterly data, seasonally adjusted; Capacity utilization: axes cross at normal capacity utilization level.
Percent Percent
Capacity utilization in manufacturing
60
62
64
66
68
70
72
74
76
78
80
75
95
115
135
155
175
195
215
235
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
2012 2013 2014 2015 2016 2017
capacity utilization (rhs) Total
Buildings Underground
Dwellings
Quarterly data. Capacity utilization: seasonally adjusted;
Order stocks: price, seasonally and w orking-day adjusted.
2010=100Percent
Order stocks and capacity utilization in construction industry
Manufacturing near pre-crisis peak
Construction is booming
Services less pronounced, but above normal
5KOOTHS | German Economy at Full Steam
Gross domestic product
Calendar adjusted
» 2017: +2.6 percent
» 2018: +2.6 percent
» 2019: +2.3 percent
Previous-year forecast (calendar adjusted)
» 2017: +2,0 Prozent
» 2018: +2,0 Prozent
» 2019: +2,3 Prozent-0,6
-0,4
-0,2
0,0
0,2
0,4
0,6
0,8
1,0
1,2
105
110
115
120
I II III IV I II III IV I II III IV I II III IV I II III IV
2015 2016 2017 2018 2019
qoq-change (rhs) level
Gross domestic product
Percent
1,7 1,9 2,3 2,5 2,2
2010 = 100
Quarterly data: Price, seasonally and calendar adjusted, qoq-change.Annual data: Price adjusted, yoy-change.
6KOOTHS | German Economy at Full Steam
Broad-based expansion
Foreign trade NOT neutral» Favorable external environment
» Induced imports
Investment activity» Financing conditions
» Increase in capacity
» Dwellings
Consumption only slightly weaker» Private: Fading out oil-price effect
» Public: Fading impulse from refugee costs
7KOOTHS | German Economy at Full Steam
Brighter export picture
Robust world economy, euro area recovery
Improved order inflows and stocks
High export business expectations
Export markets
» Better business climate
» Low uncertainty
-1
0
1
2
3
4
105
115
125
135
145
155
I II III IV I II III IV I II III IV I II III IV I II III IV
2015 2016 2017 2018 2019
qoq-change (rhs) level
Exports
Percent
5,2 2,6 4,3 5,0 4,7
2010 = 100
Quarterly data, price, seasonally and calendar adjusted, qoq -change.
8KOOTHS | German Economy at Full Steam
Comeback of M&E investment spending …
Global environment
Record high business climate in M&E industries
High and increasing capacity utilization
Extremely low financing cost
-6
-4
-2
0
2
4
6
100
105
110
115
120
125
130
135
I II III IV I II III IV I II III IV I II III IV I II III IV
2015 2016 2017 2018 2019
qoq-change (rhs) level
M&E Investments
Percent
3,9 2,2 4,1 6,4 4,3
2010 = 100
Quarterly data, price, seasonally and calendar adjusted, qoq -change.
9KOOTHS | German Economy at Full Steam
… but less pronounced cyclical pattern
Lack of skilled labor
Demographic outlook
Higher plasticity(software replaces hardware)
-6
-4
-2
0
2
4
6
-25
-20
-15
-10
-5
0
5
10
15
20
25
1991 1995 1999 2003 2007 2011 2015 2019
Output gap (rhs) GFCF Machinery and equipment
Annual data. GFCF, machinery and equipment: volumes, change on previous year;
Output gap: in percent of potential output.
Percent Percent
Investment cycles
10KOOTHS | German Economy at Full Steam
Construction is booming
Housing as main driver
» Financial conditions
» Labor market
» Structural demand (household patterns, immigration)
Record high capacity utilization and order stocks
Strong price effects
» 2017: +3.2 %
» 2018: +3.5 %
» 2019: +3.5 %
Risk of capacity limits
-6
-4
-2
0
2
4
6
100
105
110
115
120
125
130
135
I II III IV I II III IV I II III IV I II III IV I II III IV
2015 2016 2017 2018 2019
qoq-change (rhs) level
Constructions
Percent
-1,4 2,7 3,6 3,5 4,4
2010 = 100
Quarterly data, price, seasonally and calendar adjusted, qoq -change.
11KOOTHS | German Economy at Full Steam
Private consumption somewhat more moderate
2017-H1: Gains in purchasing power (oil)
Wages: Gross (net)
» 2017: +4.5 (+4.3) %
» 2018: +4.6 (+4.4) %
» 2019: +4.6 (+4.5) %
Social transfers
» 2017: +3.7 %
» 2018: +3.0 %
» 2019: +3.5 %
Inflation picking up
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
102
104
106
108
110
112
114
116
118
I II III IV I II III IV I II III IV I II III IV I II III IV
2015 2016 2017 2018 2019
qoq-change (rhs) level
Private consumption
Percent
1,7 2,1 2,1 1,7 1,7
2010 = 100
Quarterly data, price, seasonally and calendar adjusted, qoq -change.
12KOOTHS | German Economy at Full Steam
Labor market increasingly tighter
Scarcity indicators» Longer vacancies
» Job offers/job seekers at long-time high
» Bright ifo employment barometer
Immigration/increasing participation» Still compensating aging …
» … but fading out in the medium-term
Earnings: Effective rate (standard rate)» 2017: +2.9 (+2.1) Prozent
» 2018: +3.0 (+2.4) Prozent
» 2019: +3.4 (+2.6) Prozent
-50
0
50
100
150
200
250
42
43
44
45
46
I II III IV I II III IV I II III IV I II III IV I II III IV
2015 2016 2017 2018 2019
qoq-change (rhs) level
Employment
1.000
398 569 653 551 495
Mn.
Quarterly dataseasonally adjusted, qoq-change.
13KOOTHS | German Economy at Full Steam
Key indicators
https://www.ifw-kiel.de/think-tank/forecasting-center/konjunkt_e/2017/kkb_38_2017-q4_deutschland_en.pdf
14KOOTHS | German Economy at Full Steam
GDP: Don’t be afraid of interim governments
15KOOTHS | German Economy at Full Steam
Risks and politics
Interim government no business cycle risk (on the contrary …)
Status-quo outlook
» 2018 almost safe in terms of policy measures …
» … but structural surplus will most likely wane by 2019
Increasing output gaps:A boom might feel good, but it carries the seeds of crisis within it
Strong momentum and transitory supply-side effects (demographics) call for moderating public finances
Demographically-induced distribution conflicts on the (near) horizon
Current account mania
16KOOTHS | German Economy at Full Steam
@kielinstitute
www.ifw-kiel.de
Prof. Dr. Stefan KoothsHead of Forecasting Center
T (Kiel) +49 431 8814-579T (Berlin) +49 30 2067-9664