‘Wise men’ of the German economy have spoken – and it’s good news (largely)

Germany's council of economic experts on Wednesday sharply lifted growth forecasts for 2017 and 2018, but warned that an incoming government has much to do to future-proof the economy.

'Wise men' of the German economy have spoken - and it's good news (largely)
The "wise men" (and women) - and women - of the council of economic experts. Photo: DPA

Europe's largest economy should expand by 2.0 percent this year and 2.2 percent in 2018, the five so-called “wise men” – who number one woman among them – predicted in a 460-page report.

That was a substantial upgrade from their March forecast of 1.4-percent growth this year and 1.6 percent next year.

“The German economy is in a powerful upturn,” they wrote, so much so that it could be in danger of “overheating”, or growing at a pace faster than it will be able to maintain for the long term.

But strong growth for now offers plenty of options for an incoming government to modernise Europe's powerhouse, they added.

Chancellor Angela Merkel's conservatives are locked in talks with the liberal Free Democrats and the ecologist Greens to forge an untested three-way coalition following elections in September.

The economists advised leaders to reduce public debt, dismantle or lower some taxes, especially for the middle classes, and create an “innovation-friendly” environment for the digital economy.

A “solidarity surcharge” introduced to help pay for German reunification after 1990 should be abolished, they argued, backing a pet cause for the liberals.

They also warned that “one can already identify a shortage of skilled workers in some areas,” a risk that will grow as Germany's baby-boomer generation heads for retirement in the coming years.

Politicians can partly fend off the problem by making it easier to combine work and family life, improving education and training and making it easier for companies to hire people from abroad with urgently-needed skills, the experts said.

“Different parties each see the advice in their own way,” Chancellor Angela Merkel said as she accepted her copy of the report from its authors in Berlin.

Implementing the experts' counsel “isn't always as simple politically as it is obvious economically… we have to find the right balance” between growth-friendly tax cuts and fiscal prudence, she said.

Defy Trump, cushion Brexit

Beyond Germany's borders, the report called for leaders to “decisively confront” protectionism in international trade that has taken centre stage since the US election of Donald Trump.

“Exhausting the remaining potential of liberalising trade could bring further increases in prosperity,” the experts argued, urging Washington and Brussels to resume stalled talks for a transatlantic trade deal known as TTIP.

Within the European Union, “momentum from France's President [Emmanuel] Macron can give the federal government a tailwind to drive integration forward together,” the report said.

The authors argued leaders should reform rules designed to steady member states' finances and buttress the bloc's internal market, especially with new initiatives for an EU-wide level playing field in the banking sector and capital markets.

The experts still hope Britain's departure from the EU can be stopped, but pressed for an agreement “that would minimise damage for both sides” if it goes ahead.

“Negotiating such a deal would likely take longer than the two years provided for in Article 50” of the EU treaty, they noted, suggesting a “one-off extension” of the deadline to ease talks.

Nevertheless, the EU's so-called “four freedoms” – of movement of capital, people, goods and services — are “essential”, they added, ruling out “cherry-picking” from London.


German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.