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Germany Economic Forecasts and Risk Ratings

Domestic economic resilience in the face of tough global conditions.

Despite a challenging international context, Germany remains on a robust growth path. Against the background of geopolitical crises in the Ukraine and Middle East, terrorism, uncertainty about Greece, a massive influx of refugees, and Brexit, the German economy has grown at a solid annual pace of roughly 1.5% since late 2014. German GDP growth continues apace, driven primarily by domestic demand as net exports have essentially ceased to contribute since 2013. The purchasing managers’ index (PMI), which experienced setbacks in late 2015 and in mid-2016 after the Brexit vote, has since rebounded to levels indicative of healthy economic expansion. The German economy enjoys a high degree of international competitiveness and, more importantly, persistently robust consumer demand resulting from real income and labor-market developments. However, the boost to purchasing power from oil price declines during November 2015-January 2016 has partially unwound since, and rising inflation is expected to weaken real income growth. Nevertheless, the euro’s 20% depreciation against the US dollar since mid-2014 has helped German exports, while the European Central Bank (ECB)’s extreme easing course has supported investment via favorable financing conditions.

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April 2017 Forecast Highlights

  • GDP growth has averaged 0.4% quarter-on-quarter since mid-2013.
  • With an economy operating at near full employment on a national average basis, and in the context of rising commodity prices, inflation will accelerate from 0.5% in 2016 to 2.1% in 2017, weakening real income growth and potentially leading to higher pay demands from unions.
  • With a financial surplus in tow, the German government will continue to push for income-tax cuts and increased public spending on transportation and IT infrastructure.

Near-Term Economic Outlook

  • Heavily supported by domestic demand, Germany’s economy is well positioned to fend off any sudden downturn that could be triggered by international developments during 2017–18.
  • In 2017, the European Central Bank will continue to implement expansionary monetary policy as well as looser fiscal policy given budget surpluses.
  • Chancellor Angela Merkel’s Christian Democratic Union (CDU) party is expected to see reduced support during the September 2017 federal elections.

Country Risk Rating for Germany

Leading to the upcoming general election in September 2017, Chancellor Angela Merkel's center-right CDU/CSU and the center-left SPD with its candidate Martin Schulz are competing for voters' support in order to form a new coalition government. Regardless of the final composition of the new administration, the right-wing anti-immigration AfD will not be part of a governing coalition as all other major parties have ruled out working with it. Germany is exposed to a high risk of mainly low-capability terrorist attacks by lone actors or small cells who sympathize with non-state armed groups such as the Islamic State. In addition, the risk of far right and far left protests is likely to remain high in the coming months.

A note on our risk ratings: IHS Markit derives country risk ratings for 206 countries, based on six separate ratings in each country: political, economic, legal, tax, operational and security with 22 detailed sub-aggregate risks. These ratings allow you to quantify risk with greater specificity with a scoring system based on a 0.1-10 logarithmic scale. Seven risk bands, from low to extreme, allow you to compare and contrast risk between countries and regions.

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