Germany's Robust Upswing Should Be Used for Reforms -Council of Economic Advisers

By Andrea Thomas Features Dow Jones Newswires

Germany is enjoying a robust economic upswing that could last for some time and which offers good conditions for growth-friendly reforms, the government's council of economic advisers said Wednesday, raising its growth forecast.

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In their annual report, the advisers known as the "wise men" predicted Germany's gross domestic product to accelerate by 2.0% this year and by 2.2% in 2018. Back in March, the government advisers predicted growth of 1.4% for this year and 1.6% for next.

"The German economy is experiencing a major upturn," the report said, stating that production capacities are overutilized.

"The sound economic situation provides an opportunity to re-adjust economic policy."

The council's forecast is in line with the 2.0% the government predicts for this year but more optimistic about next year, as the government predicts 1.9% and the International Monetary Fund expects 1.8% growth for 2018.

Germany's economy has been enjoying years of steady growth, making it one of the eurozone's most robust economies. The strong labor market has also helped to balance the country's budget, which has seen surpluses since 2014.

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With Germany's upturn expected to last, the country's next government is in a good position to implement reforms, the report said.

Chancellor Angela Merkel's conservatives are currently in exploratory talks with the pro-business Free Democrats and the Greens to form the next government.

"This re-adjustment should focus on the challenges of the future from globalization, demographic change and digitization, and no longer on income distribution," it said.

The council called for growth-friendly reforms, such as tax cuts that would address the issue of bracket creep, whereby workers whose pay barely tracks the rate of inflation can slip into higher tax brackets and end up worse off.

It also proposed a gradual phase-out of a surcharge introduced in the 1990s to fund Germany's reunification and said contributions into the mandatory unemployment insurance system should be reduced due to low jobless figures.

In its report, the council also urged the European Central Bank to "urgently" communicate a far-reaching strategy for a normalization of its monetary policy, which is currently in a very loose mood.

"The ECB should end the bond purchases earlier than it has announced to date," the report said. "After the purchase program has ended, medium and longer-term interest rates may better reflect market participants' views again."

Last month, the ECB decided to cut the monthly rate of bond purchases to 30 billion euros ($34.76 billion) from EUR60 billion at the start of 2018. The move was seen as a first step toward removing the massive support provided to the economy by policy makers since mid-2014, although the central bank made it clear the bond-buying program--known as quantitative easing--could be extended again beyond its tentatively scheduled termination in September 2018.

It also left its interest rate unchanged at a record low of 0%, while its deposit rate is at minus 0.4%, meaning that banks pay to leave excess cash at the central bank overnight.

The council warned that due to the low interest rate policy, risks in the financial system have increased.

"On the one hand, there is a risk of excessive asset prices, particularly with regard to residential properties and bonds," the report said. "On the other, the interest rate risks incurred by banks have increased considerably as banks are granting loans with longer fixed-interest periods while depending on short-term forms of funding."

Should the ECB decide to rapidly increase interest rates, "turbulence in the financial system must be expected, even though credit growth remains relatively moderate at present," it warned.

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

(END) Dow Jones Newswires

November 08, 2017 05:14 ET (10:14 GMT)