German Economy to Gain Additional Momentum in 2016, IHS Says

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Emerging market woes to only partially offset robust domestic demand

FRANKFURT, Germany–(BUSINESS WIRE)–The German economy is forecast to beat government growth expectations in
2016, according to new analysis from IHS Inc. (NYSE:IHS), the leading
global source of critical information and insight.

Headline growth in real gross domestic product (GDP) is expected to be
2.1 percent this year, up from 1.7 percent in 2015, exceeding the German
government’s official forecast of 1.8 percent. Accelerating growth is
expected despite the restraining impact of weakness or outright
recessions in a number of emerging markets because German domestic
demand is likely to be firing on all cylinders in 2016.

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Exports will be more resilient than generally expected

“Although the economic slowdown in China and recessions in large
emerging markets such as Russia and Brazil will certainly leave their
mark on global trade in general and German exports in particular, there
are offsetting factors,” said Timo Klein, IHS
Global Insight
economist. “Among these factors are healthier U.S.
and U.K. economies and a gradually strengthening Eurozone that is
recovering from the debt crisis that dominated developments during the
first half of the decade. Two-thirds of German exports go to either
other EU countries or the U.S.”

Furthermore, the fairly weak stance of the euro, which is closely linked
to an extremely soft monetary policy from the European Central Bank
(ECB), is expected to enable German exporters to gain market share in
trade with non-Eurozone countries.

Nevertheless, growth in imports is seen to outperform that in exports,
leading to a modest negative contribution of net exports to GDP growth.
Import strength reflects the expected robustness of domestic demand,
which will also boost purchases of goods from abroad.

Domestic demand is benefiting from an unusually supportive
constellation

Private consumption, which has been fairly weak in Germany for most of
the past 20 years, now benefits from fairly high real income growth by
historical standards. Nominal wage growth of around 3 percent is
accompanied by inflation at around 0.5 percent, with additional oil
price declines since November 2015 ensuring that purchasing power will
continue to gain at a healthy clip in 2016. Labor market conditions are
the best in at least 25 years, employment levels have reached all-time
highs and unemployment is still trending lower at present. Consumer
confidence will thus remain high in the foreseeable future.

At the same time, investment in equipment that has been held back in
recent years due to elevated uncertainty linked to the Eurozone debt
crisis is expected to come more to the fore in 2016, and construction
will pick up for the long-neglected (transport and IT) infrastructure
and for housing – the latter not least due to the recently accelerating
refugee influx.

Finally, public expenditures will increase much more strongly than
during 2010-14, owing to the aforementioned requirements to boost
infrastructure and to meet refugees’ subsistence, and subsequently job
qualification, needs. The government has already indicated they are
willing to use recent budget surpluses for these purposes and will not
tighten fiscal policy elsewhere to compensate.

Political uncertainties related to managing the refugee crisis
harbors the largest risk

The largest risk to this fairly positive outlook is linked to the
refugee factor. This pertains not so much to the direct impact on the
labor market – unemployment is likely to turn higher from about mid-2016
onwards as refugees with resident status enter the jobs market. However,
employment should continue their ascent in any case – but to potentially
unsettling political conflicts about measures to limit immigration.

On balance, IHS Global Insight remains confident that the government
will find solutions that will prevent any severe disruptions to economic
activity, such as violent clashes on the streets or goods transport
being lastingly inhibited by strict border controls.

About IHS (www.ihs.com)

IHS (NYSE: IHS) is the leading source of insight, analytics and
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8,600 people in 32 countries around the world.

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