A group of leading research institutions have joined the German government and others in providing a bleak vision for the future of German economic growth. It expected German GDP to rise by only 0.5% this year and 1.1% in 2020. Economic institutes expect growth to rise to 1.4% in 2021. Their expectations were weaker than their spring forecast that the economy, the largest in Europe, will grow by 0.8% this year and 1.8% in 2020. Over the past year, GDP increased by 1.5%. The economy contracted slightly in the second quarter and is widely believed to contract further in the just-ended third quarter, putting it into a technical recession.
The think tanks cited political uncertainty such as trade tensions, the risk of a no-deal Brexit, low global demand for investment goods such as factory machines that Germany specializes in exporting and “structural changes” in the important auto industry.
“In the current situation, there is no strong indication of a 'deep economic crisis',” said Klaus Michelsen of the Berlin-based DIW Research Institute. “There is no need for some kind of comprehensive stimulus package developed a decade ago during the 2008-2009 global financial crisis. But he warned that the government would be wrong to stick to its policy of keeping the budget balanced for that. "Alleviating the crisis exacerbates problems," he said.
The unorderly Brexit would likely cut 0.4 percentage points from Germany's economic growth rate in 2020 and 0.3 points in 2021, but the outlook could improve if future EU relations with Britain are coordinated quickly, Michelsen said.
German employment is expected to grow by 380,000 this year. Only 120,000 and 160,000 new jobs are expected in the next two years. The unemployment rate was expected to rise to 5.1 percent next year from 5 percent this year. Thereafter, the rate is expected to decline to 4.9 per cent in 2021.
In contrast, German inflation is expected to rise to 1.5 percent next year from 1.4 percent this year. In 2021, inflation is expected to rise to 1.6 percent. The country's budget surplus is expected to be enormous this year, reaching around 50 billion Euros, but is expected to reach 4 billion Euros by 2021.
Various financial measures such as additional pension benefits, child benefit increases and income tax relief, not least of which is the partial cancellation of additional solidarity costs, can be expected to help reduce fiscal surpluses.