Experts cut German growth forecast

Germany's four leading economic research think tanks said on Thursday they now expect the nation's economy to grow by 1.6 percent in 2016, instead of 1.8 percent as forecast in autumn 2015.

"The revision was entirely due to the marked cooldown in the world economy at the end of 2015," said Timo Wollmershäuser, interim director of the Ifo Center for Business Cycle Analysis and Surveys. "Germany’s domestic economy is even stronger today than it was last autumn," he added.

In their joint annual spring economic forecast, research groups DIW, Ifo, IWH and RWI said that growth was being driven primarily by robust private consumption.

Boosting demand

Researchers said domestic demand in Germany would remain strong due to continued employment growth, substantial raises in wages and improving purchasing power on the back of lower energy prices. Low interest rates are also boosting demand, they pointed out.

Increased spending by the government to cope with the huge influx of migrants and refugees into the country over the past year is also expected to fuel economic expansion in 2016 and 2017, the institutes noted.

The additional expenditure on refugees, however, would lead to a reduction in the government's budget surplus, the think tanks said.

"Expenditure related to the inflow of refugees will rise and fiscal policy will be slightly expansive. Thanks to a marked increase in income tax revenues, taxes from revenues and social contributions and lower spending on interest, the German federal government will nevertheless post a budget surplus of 11 billion euros ($12.4 billion) this year and 10 billion euros in 2017," they estimated.

Subdued investment

The German labor market, the research groups said, would continue to improve in the coming months, underlining that the labor force would grow by 500,000 on average this year and by 390,000 in 2017.

Nevertheless, the availability of refugees in the labor market would push up the unemployment rate, they warned. "However, the average unemployment rate of 6.2 percent this year and 6.4 percent in 2017 will remain almost unchanged."

Meanwhile, on the investment front, activity would remain subdued, the experts said.

They stressed that while investment in residential construction would continue to grow on account of low interest rates, a strong labor market and an increasing demand for housing, corporate investment in equipment and commercial construction would increase sluggishly due to deteriorating business expectations in the face of a global economic slowdown that began earlier this year.

"There are now a growing number of signs that the global economy will not continue to weaken in the first half of 2016," the institutes said. "It is expected to pick up again somewhat over the rest of the forecasting period, albeit only moderately. After a modest upturn in the spring, German exports are expected to see slightly higher growth in the second half of the year."

The economists also criticized the German government for having focused more on consumption and distribution policy spending, rather than on growth-oriented measures. "The continued pursuit of the economic policy of recent years, which has done little to promote growth, is not a sustainable path."