Cheap oil, weak euro powering German recovery: institutes

16th April 2015, Comments 0 comments

The German economy, Europe's biggest, is enjoying a robust recovery, fuelled by cheap oil, the weak euro and a boom in consumer spending, the country's top economic institutes said Thursday, sharply upgrading their growth forecast for this year.

The institutes -- the DIW in Berlin, IWH in Halle, Ifo in Munich and RWI in Essen -- predicted that gross domestic product (GDP) would expand by 2.1 percent this year, faster than the 1.6 percent recorded in 2014.

The 2015 forecast was also much higher than the 1.2 percent they had foreseen last autumn.

"The German economy is in a robust upturn, stimulated by unexpectedly expansive impulses, particularly the drop in oil prices and the sharp devaluation of the euro," the institutes said in their traditional spring forecast.

"Private consumption is the main pillar of the recovery, benefitting from the decline in oil prices, which enhances consumers' purchasing power," they said.

The favourable situation on the labour market and rising wages were also a positive factor, and consumer spending was projected to rise by 2.5 percent this year.

Another positive element was increased exports, thanks to a "sharp rise in price competitiveness" that would continue to be felt into next year, the institutes said.

Momentum is expected to slow only slightly next year, when the weak euro would continue to provide a boost to the economy as the positive effects of low oil prices would fade, the institutes predicted as it anticipated overall GDP growth of 1.8 percent for 2016.

The institutes' estimate comes ahead of the government's official forecast to be released next Wednesday by Vice Chancellor and Economy Minister Sigmar Gabriel, which is also expected to be decidedly more upbeat.

In January, the government had predicted 1.5 percent GDP growth for this year.

- Monetary policy boost -

Sentiment in both Germany and the wider eurozone has become noticeably brighter this year, particularly following the decision by the European Central Bank to embark on a programme of so-called "quantitative easing" or QE.

That is a massive 1.1-trillion-euro ($1.2-trillion) bond buying programme aimed at stimulating the eurozone economy and pushing up inflation to bring it back to levels conducive to healthy economic growth.

One of the effects of QE has been to push down the euro, making exports cheaper and more competitive.

The institutes also predicted that the unemployment rate, already among Europe's lowest, will drop to 6.3 percent in 2015, from 6.7 percent last year, and decline further next year to 5.9 percent.

The researchers expect currently low consumer price inflation to rise only slightly to 0.5 percent this year, and to 1.3 percent in 2016.

Germany's current account surplus was expected to rise to a new record of 256 billion euros, or 8.5 percent of annual economic output, from 219.7 billion euros or 7.6 percent of GDP in 2014, the institutes said.

And it would continue to rise to 266 billion euros or 8.5 percent of output in 2016.

The buoyant recovery would also have a positive effect on Germany's public finances, with the government projected to run up a budget surplus of 21 billion euros this year and 26 billion euros next year, compared with 18 billion euros in 2014, they said.

"Given the structural surplus, now would be a favourable time to make the income tax rate -- particularly in the area of small and medium incomes -- more performance-friendly," the institutes wrote.

© 2015 AFP

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