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The German economy is experiencing a strong upturn driven by unexpected expansive impulses, especially the falling oil price and the sharp depreciation of the euro, according to the joint economic forecast released by the Ifo Institut.
Gross domestic product is expected to increase by 2.1% this year. The 68% projection interval ranges from 1.1% to 2.8% with consumption being the driving force behind the upturn. The rest of the euro area is also expected to produce slightly positive impulses, meaning that international trade will contribute to growth, said the forecast, compiled by DIW and Austria’s Wifo, IWH and Kiel Economics, ifo Institut and KOF Zurich, and RWI and HIS of Vienna.
The pace of growth is only expected to slow slightly in the year ahead, the report said, adding that the euro’s depreciation will continue to stimulate the economy, while the positive effects of the lower oil price are expected to fade. Public budgets will show significant surpluses of over 20 bln euros in 2015 and 2016, respectively. In view of large structural surpluses, time is ripe to make the income tax rate more performance-oriented – especially for small and medium-sized companies, the research groups and think tanks said.
Looking outward, world production is expected to expand at a slightly faster pace in spring 2015. Strong impulses will come from the sharp drop in the crude oil price, which has almost halved since June 2014. The oil price drop is mainly due to oil-market specific causes and contributed to an economic upturn in advanced economies back at the end of 2014.
In the major emerging economies, by contrast, the economic climate remains fairly weak overall. China’s growth rate has been declining since mid-2014 as a result of falling real-estate prices. In Brazil production is overall stagnating, and Russia is currently in a recession.
On the whole, monetary policy has become even more expansive in recent months, while the gap between the monetary policies pursued by the major advanced economies has widened. The Bank of Japan extended its existing bond buying programme back in October and the ECB launched an extended programme in March.
However, the central banks in several emerging economies have lowered their interest rates in recent months.
The US Federal Reserve, by contrast, is continuing to gradually tighten its monetary policy and wound down its bond purchasing programme at the end of 2014. The Fed is expected to increase the Federal Funds Rate in 2015.
The growing divergence in monetary policy orientation has meant that several currencies, including the euro and the yen, have depreciated significantly against the US dollar since last summer. Monetary policy worldwide is expected to remain markedly expansive during the forecasting period. US interest rates will only be raised in small steps, while the ECB will continue to implement its policy of quantitative easing until at least September 2016.
