The upturn in Germany is entering its sixth year. One of its central pillars is the domestic economy, which is being stimulated by strong growth in employment and low interest rates. At the beginning of the year capacity utilisation levels were still very high, but have not increased further since for both demand-side and production-side reasons. On the one hand, the number of incoming orders has been in decline since the beginning of the year, partly because the economy in the largest German sales markets slowed down during the first six months of the year. On the other hand, companies are apparently facing growing supply-side bottlenecks, especially in terms of labour and intermediate goods. This is reflected in the production slowdown this year, despite full order books.

During the summer, economic activity was overshadowed by high production and delivery fluctuations in the automotive sector. Bottlenecks in certifying the new WLTP procedure that is required for all newly registered vehicles as of 1 September 2018 resulted in large build-ups in inventories, as well as intermittent production and delivery halts. Given the size of the automotive industry, this will impact the macro economy. In the second quarter of 2018 gross domestic product is only expected to have increased by 0.1% versus the previous quarter. The institutes expect the automotive sector to largely overcome its weakness in the last quarter of the year. As a result, economic growth will pick up strongly in the fourth quarter.

Fiscal policy will stimulate the economy at the beginning of 2019. Transfers and expenditure programmes will be expanded and the tax burden on employees will be lightened. Sustained favourable monetary conditions will also continue to bolster the economy. Stimuli from foreign trade, however, will be weaker as the world economy gradually slows down. On top of this, the domestic labour force potential is increasingly being exhausted and immigration is slowing down. Overall, the upturn is expected to gradually lose impetus over the forecasting horizon.

Gross domestic product is expected to increase by 1.7% this year on average. This represents a downward revision by 0.5% percentage points versus the institutes’ spring forecast. Stimulated by fiscal policy, the German economy is expected to grow slightly more strongly in 2019 than this year at 1.9%. The 1.8% increase in gross domestic product forecast for 2020 overstates the economic dynamism due to the high number of working days in this year. All in all, the over-utilisation of economic capacities in the forecasting horizon will continue.

In the labour market the longer periods of time that job vacancies remain unfilled and higher wage pressure suggest that the supply of workers is increasingly unable to satisfy firms’ high demand. Accordingly, growth in employment will gradually weaken over the forecasting horizon. On average the number of employed persons will rise by 590,000 this year. This figure will fall to 420,000 in 2019 and to 310,000 in 2020. On the one hand, it will be increasingly difficult to fill vacant positions with jobseekers, and the decline in unemployment will drop from 190,000 this year to 140,000 in 2019 and 120,000 in 2020. This corresponds to an unemployment rate of 5.2% this year and 4.8% and/or 4.5% in the next two years to follow. On the other hand, the potential labour force will increase to a lesser degree than to date. Positive trends in participation and immigration will increasingly fail to compensate for the age-related decline in the labour force.

Due to the growing labour shortage, wages will continue to rise sharply. After this year’s 2.6% increase, agreed monthly wages can be expected to increase by an average of 2.7% in 2019 and 2020 respectively. Effective wage payments will increase more than collectively-agreed wages, since above tariff wage components will play an increasingly important role in attracting new employees and retaining existing staff.

Private consumption will continue to make a significant contribution to economic growth. The disposable income of private households will rise clearly in the two years ahead, boosted by fiscal policy, including reductions of the effective income tax rate and the return to equal contributions in statutory medical insurance. Disposable income will also be stimulated in the year ahead by the sharp increase in social benefits, mainly due to the higher pensions for mothers and another significant increase in old-age pensions. The inflation rate will rise from 1.8% this year to 2.0% next year and 1.9% in 2020. While the currently dominant influence over inflation, namely energy prices, will fade, core inflation will rise more sharply.

Thanks to very high capacity utilisation and favourable financing conditions, investment activity will also remain very strong over the forecasting horizon. The gradual loss of momentum in the upturn and severe bottlenecks in the labour market will nevertheless act as constraints. In the construction sector, in particular, capacity bottlenecks will continue to hamper economic activity reflected in a steep increase in construction prices. German exports will not regain momentum until the end of the year. Catch-up effects in automotive exports on completion of the certification of new cars will play a key role. Exports will only increase at gradually declining rates in line with world economic developments over the remainder of the forecasting horizon.

The institutes expect significant fiscal surpluses over the entire forecasting horizon. This year the surplus will total 54 billion euros or 1.6% of gross domestic product, thus hitting a new record high. In the subsequent years the German federal government’s expansionary measures will make themselves felt and the fiscal balance will melt down to 41 billion euros (1.1% of gross domestic product). The structural fiscal balance will total 43 billion euros this year (1.3% of potential production). In the next two years it will be around half of this sum. The government’s gross debt level in relation to gross domestic product will drop to around 60% in 2018. In 2019 it will fall below the Maastricht benchmark reaching 55% by 2020.