German think-tanks lift growth forecasts as sun shines

Merkel can count spending on record budget surplus

FRANKFURT AM MAIN, Sept 28, (Agencies): Germany’s leading economic think tanks upgraded growth forecasts for 2017 and next year Thursday, as Europe’s largest economy basks in increased consumption, exports and investment untroubled by Brexit or Donald Trump.

Gross Domestic Product (GDP) should grow by 1.9 percent this year and 2.0 percent in 2018, experts at the DIW in Berlin, Ifo in Munich, IfW in Kiel, IWH in Halle and RWI in Essen predicted in their autumn forecast.

“The upswing in the German economy has gained in strength and breadth” since the spring edition of the study, the economists said, with domestic and export demand powering growth and adding 0.4 percentage points to the 2017 forecast.

“The strong global economy and especially the continuing upturn in the eurozone are stimulating exports,” the economists found.

Appreciation of the euro against other currencies, making German goods less competitive in countries outside the 19-nation bloc, would only have a limited braking effect, they said.

Germany’s strength in exports could make it “vulnerable to disruption” if protectionism — as preached by Trump — becomes more widespread, the economists warn, although changes since the US president took office have been “much less drastic” than feared.

But they are more relaxed about Brexit, arguing “it is becoming more likely that Britain completes its departure from the European Union with an extended transition period, avoiding sudden breaks” that could undermine trade.

Meanwhile, the number of people in work is expected to grow faster than the rate at which unemployment will decrease, as companies hire immigrants and newly-qualified refugees in their search for precious skilled labour.

The out-of-work figure should shrink from 5.7 percent this year to 5.5 percent next year and 5.2 percent in 2019.

And economic expansion will fill coffers at the finance ministry, with the government budget surplus expected to grow from 28 billion euros ($32.9 billion) this year to 44 billion by 2019 if policies are left unchanged.

Stasis in Berlin is unlikely following the election last Sunday, the results of which promise a shift from the centrist consensus under conservative Chancellor Angela Merkel and her Social Democratic coalition partners since 2013.

Low levels of debt mean the new government will be free to use surpluses to lower taxes or increase spending, the experts said.

One topic above all prompted the economists to mix a warning in with the good news.

Politicians must patch up the pension system before the full impact of the “demographic change” strikes, when millions of people born during the mid20th-Century baby boom will down tools and head for retirement, they said.

“The ageing process is already under way,” the authors wrote, urging German leaders to act during the economy’s few years in the sun before its full impact is felt.

Meanwhile, Germany’s next coalition government can count on record budget surpluses over the next two years due to a solid upswing and should use this fiscal room to lower income taxes and social welfare contributions, economic institutes said on Thursday.

The better-than-expected budget figures could help Merkel form a tricky three-way coalition with the pro-business Free Democrats (FDP), proponents of tax cuts, and the Greens after winning a fourth term as chancellor in a Sunday vote. The Greens want to lift spending on education and infrastructure.

“Indications are that this year’s overall state budget surplus will rise from 26 billion euros to 28 billion euros,” the leading economic institutes said in their joint forecast.

The surplus of all state levels — including federal government, regional states, municipalities and social funds — is projected to soar to 37.3 billion euros in 2018 and to 43.7 billion euros in 2019, they added. The upbeat projections came after Germany took a first step on Wednesday towards forming a new government when veteran finance minister, conservative Wolfgang Schaeuble, agreed to become president of the parliament, clearing the way for another party to take his job.

The institutes said Germany should utilise the additional fiscal room to improve economic conditions and reform the tax and welfare systems, especially to help low-income workers.

“In light of the high burdens imposed on labour incomes in the form of levies and a particularly sharp increase in direct tax revenues, the focus should be on the income tax rate curve,” they said, adding that there was also scope to address social security contributions.

The institutes called for a reform of the state pension system given that German society is ageing fast. They did not spell out what the reforms should be.

“The German economy is undergoing an interim high in terms of potential growth rates, which will turn out considerably lower in the coming decade for demographic reasons,” said Stefan Kooths, researcher at the Kiel Institute for the World Economy.

Merkel has ruled out lifting the retirement age to 70 as some in her party have suggested. In her first term from 2005-2009, Merkel introduced a phased increase in the retirement age to 67 from 65 until 2029.

Ifo chief economist Timo Wollmershaeuser told a joint news conference of the institutes that politicians should not dodge the pension debate, urging a further hike in the retirement age.

Pointing to labour shortages in some sectors of the economy, the institutes urged Berlin to increase efforts to integrate more than one million refugees and further reduce hurdles for highly educated workers from other European Union countries.