German economy heating up

The momentum of the expansion of the German economy is strong. Unchanged from our winter and spring forecasts, we expect a rise in gross domestic product by 1.7 percent in the current year and by 2 percent in 2018. This implies that throughout the forecasting period the expansion of aggregate output will remain higher than potential output growth, where the latter represents the long-term sustainable economic development. With capacity utilization already above normal levels, an overheating of the German economy is at the horizon. Against this background, the downward risks for the economy increase. Overall, the German economy will expand on a broad front. Exports are expected to accelerate further, owing to an upswing of the global economy. Construction activity continues to be boosted by the very favorable financing conditions. Moreover, companies are set to expand their investments more quickly due to the favorable business outlook. Private consumption, however, is likely to expand more slowly compared to previous years, mainly because higher inflation has a negative impact on the purchasing power of households’ disposable income. Employment continues to rise, and wages are expected to grow more dynamically. Germany’s general budget surplus will probably surpass the record level of the previous year. As the high surplus is only a temporary phenomenon resulting from high cyclical dynamics and low interest rates, fiscal policy should refrain from measures that permanently increase expenditures or decrease revenues, unless offsetting actions are taken simultaneously.