OECD Economic Outlook, Volume 2019 Issue 1

Germany

GDP growth slowed considerably in 2018 - as world trade lost pace and important export markets decelerated sharply, adding to temporary supply disruptions in the car and chemicals sectors towards the end of the year. GDP is projected to grow at 0.7% in 2019 and 1.2% in 2020. Mounting political uncertainties regarding trade disputes and Brexit are weighing on business confidence. Export growth and business investment are thus expected to slow. Yet, record low unemployment and strong wage growth should continue to buttress private consumption and the construction sector is booming.

Higher spending on pensions, long-term care and child benefits along with reductions in labour taxes will support domestic private demand. Accelerating the disbursal of funds set aside to upgrade digital, transport, energy and childcare infrastructure would strengthen economic growth in the long term, while providing a much needed fillip to aggregate demand now as the external outlook is weakening.

Economic growth has slowed considerably

The significant reduction of world trade growth led to a sharp slowdown of activity in Germany’s highly export‑oriented economy. This was reinforced by temporary supply disruptions in the automobile and chemicals sectors towards the end of 2018, owing to delays in the certification of new emission standards for cars and a drought. While these temporary factors have now abated, with GDP growth picking up in the first quarter of 2019, the slowdown of world trade, looming trade disputes and Brexit-related uncertainties have led to a sharp deterioration of business confidence. The weakening of the global economy is weighing on demand for investment goods, in which Germany specialises, and new export orders have fallen sharply. Industrial production has slowed down, although less so when one-off factors are excluded.

Export orders and Industrial production: Germany

Source: Statistisches Bundesamt; OECD Economic Outlook 105 database and OECD calculations.

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Germany: Demand, output and prices

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Wages and construction sector: Germany

1. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

2. Average nominal wage per employee.

Source: Statistisches Bundesamt; and OECD Economic Outlook 105 database.

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The labour market remains strong, and wage growth accelerated considerably in 2018. This has started to feed slowly into core inflation. Both the quantity and the quality of employment continue to improve, as job growth mainly concerns regular jobs, while the number of low-hour mini jobs subject to limited social contributions and protection is declining. The construction sector continues to boom.

Stepping up public investment would support demand and long-term growth

Highly expansionary monetary policy in the euro area and a further loosening of credit standards continue to result in favourable financing conditions, fuelling the housing boom. Higher public spending on pensions, long-term care and child benefits along with some relief for R&D and income taxes will lower the fiscal surplus and support private consumption and investment.

The government budget foresees higher investment in childcare, transport and digital infrastructure, in particular at the regional and municipal levels, as well as additional funds for education, research and innovation. Yet, despite a significant investment backlog, planned spending on infrastructure remains below the 2018 average in other euro area countries relative to GDP. Stepping up investment ambitions would strengthen economic growth in the long term and support domestic demand in the current downturn.

To support effective implementation of planned investment, efforts are needed to bolster planning capacity, in particular at the local government level, and simplify administrative procedures. Plans to simplify and streamline procedures to expand the electricity transmission grid are welcome. This infrastructure is crucial to speed up the transition to cleaner electricity by ensuring that wind energy produced in the north of the country can be transmitted to the south, where industrial activity is concentrated. Similar ambition in other areas would promote a faster upgrade to higher-speed digital infrastructure in rural areas, promoting the adoption of digital technologies, economic growth and regional cohesion. Faster investment in high‑quality childcare would promote equal opportunities in education and allow parents to align their working hours with their desires. This would also help to reduce significant gender gaps in career opportunities and wages.

Weaker global trade and capacity constraints will slow economic growth

Public and private consumption are projected to support growth, as wages and employment will continue to expand, albeit at a more subdued pace, as significant uncertainty about the external environment is likely to lead to more prudent private-sector wage agreements. Inflation is expected to remain well below 2%. While high capacity utilisation and favourable financing conditions support investment, its growth should slow down due to the weaker global outlook. Capacity constraints and labour shortages are expected to contribute to a slowdown in housing investment. As export growth is weakening, the current account surplus is expected to fall slightly, to 7% of GDP by 2020.

Several external risks could combine to lead to a sharper and more prolonged slowdown of the German economy. These include an intensification of global trade disputes, in particular if this were to involve tariffs on German cars, a sharper slowdown in China than expected or a disruptive Brexit. On the other hand, if domestic demand and imports were to be stronger than projected, the German economy could become the locomotive for faster growth in the euro area. A swift and flexible increase in public spending or steeper labour tax cuts would make such a scenario more likely.