Key Institutes: Germany Continues to Enjoy Robust Upswing -- Update

By Andrea Thomas Features Dow Jones Newswires

Germany's economy is enjoying a robust upswing and some segments of the economy can't keep up with growing demand, according to the latest report of leading German think tanks, which calls on the next government to cut labor costs and taxes amid high budget surpluses.

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In their biannual report published on Thursday, the institutes raised their growth projections for Europe's largest economy due to strong consumer spending, exports and investment spending.

"The German economic upturn has gained both in terms of strength and breadth," the Munich-based Ifo institute, the Essen-based RWI, the DIW in Berlin, the IWH in Halle and the IfW in Kiel said in a joint research report.

They forecast growth of 1.9% in 2017, compared with April's prediction of 1.5% and after 1.9% growth posted in 2016. Germany's economic growth rate is expected to accelerate to 2.0% in 2018, compared with an earlier estimate of 1.8%, and seen expanding by 1.8% in 2019.

"Growth was driven by exports, which gained momentum in the first half of the year. Domestic demand, however, likewise remained a driving force behind the expansion," said Stefan Kooths, Head of the Forecasting Center at the Kiel Institute for the World Economy.

"As the economy has already headed in a robust upward direction for some time, initial signs of tension are discernible in a number of segments of the economy."

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He said companies needed increasingly longer to fill open positions and the construction sector in particular didn't find enough staff, which was impairing their output.

The think tanks also called on the next government to cut non-wage labor costs and income taxes, highlighting the fiscal leeway that coalition parties have when the take up negotiations to form the next government. Chancellor Angela Merkel's conservatives, the pro-business Free Democrats and the environmentalist Greens are expected to take up coalition talks in the coming weeks following Sunday's vote.

"Germany today has a public sector that is able to take action based on a strong economy," the institutes said. "The general government budget surpluses likely to be unfolding for the forecast period should be utilized in order to improve the economic conditions."

The think tanks forecast continued solid public finances with the national budget surplus seen rising to 28.3 billion euros ($33.27 billion), or 0.9% of gross domestic product, this year from EUR25.7 billion or 0.8% in 2016. For 2018, they forecast a surplus of 1.1% of GDP that will increase to 1.2% in 2019.

Thanks to the strong economy, Germany's unemployment rate will fall to 5.7% this year, from 6.1% in 2016, to 5.5% in 2018 and to 5.2% in 2019, they forecast.

Germany's current-account surplus, a broad measure of its foreign trade and investment balance, will fall slightly. The institutes expect it to decline to 7.8% of GDP this year, after 8.3% in 2016, before rising slightly to 7.9% in both 2018 and 2019.

Germany has been under fire for its huge current account and trade surpluses for years, but the new U.S. administration under President Donald Trump has stepped up criticism, accusing Europe's largest economy, along with China, of unfairly benefiting from their weak currencies at America's expense.

The think tanks also called on the European Central Bank to prepare the exit from its "very expansive" monetary policy and start reducing its massive monetary-stimulus program amid growing signs that the eurozone's upswing has strengthened. A first interest rate hike "should be appropriate in the further course of the forecast period," said the institutes in their report for the years through to 2019.

The ECB's key rate has been negative since June 2014.

Write to Andrea Thomas at andrea.thomas@wsj.com

(END) Dow Jones Newswires

September 28, 2017 05:33 ET (09:33 GMT)