Germany trims 2016 growth forecast as foreign trade drags

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People pass a shop window with a sale offer up to 70 percent in Munich downtown, Germany, January 27, 2016. Photo: Reuters/Michaela Rehle People pass a shop window with a sale offer up to 70 percent in Munich downtown, Germany, January 27, 2016. Photo: Reuters/Michaela Rehle
Germany has lowered its growth forecast for 2016 in the face of an emerging market slowdown that is dampening exports, leaving domestic demand as the sole pillar of support for Europe's biggest economy this year.
Chancellor Angela Merkel's cabinet agreed its annual economic report on Wednesday in which it expects gross domestic product (GDP) to grow by 1.7 percent, on a par with the 2015 performance, but below a previous forecast of 1.8 percent.
The report underlined a fundamental shift in Germany's economy away from a reliance on exports and towards more domestic-driven growth as demand from China and other emerging markets has waned.
Berlin expects imports to rise at a faster rate than exports throughout 2016, meaning net foreign trade is likely to clip 0.4 percentage points off of economic growth.
This is a remarkable development for an economy that for decades has relied mainly on exports to countries around the globe, led by its engineering and auto sectors.
The shift leaves domestic demand as the sole propellant of growth this year. The government expects a rise in consumer spending by 1.9 percent and spikes in construction investment by 2.3 percent and of state spending by 3.5 percent.
Rising real wages, rock-bottom interest rates and record-low car fuel costs due to the plunge in oil prices are giving a strong boost to consumer purchasing powers.
In addition, the state is spending billions of euros to accommodate and integrate a record influx of more than one million refugees and migrants.
"The German economy is in good shape," a cabinet statement said, adding the labor market remained solid and employment was expected to rise further, pushing up the tax take.
Berlin reiterated its goal to keep the federal budget balanced for the third consecutive year in 2016 despite the higher state spending on infrastructure and refugees.
Nonetheless, Economy Minister Sigmar Gabriel said he was dissatisfied with the expected growth rate, saying Germany needed to speed up digitization and improve its research and development programs.
"In view of the good general conditions such as the low oil price and favorable exchange rate, economic dynamism should really be above present economic growth of 1.7 percent," Gabriel told the Rheinische Post newspaper.
He also said Germany should do more to promote electric cars and facilitate private investment, adding that Finance Minister Wolfgang Schaeuble's cherished goal of a balanced budget should not be seen as a dogma.

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