Reliable Forecasts

A Bubblegum Recovery

  • Why it matters

    Why it matters

    Economic forecasters think Germany will continue to grow, but are struck by companies’ reluctance to invest, which they say is hampering a more substantial recovery.

  • Facts

    Facts

    • The German government predicts GDP growth of around 1.4 percent this year.
    • Academic research published last month suggested that most economists’ predictions of GDP, price inflation, and other key indicators were inaccurate.
    • Economic forecasters differ on whether lagging corporate investment will improve this year, having remained stubbornly low throughout the economic recovery.
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    Audio

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Ifo-Index sinkt weiter
Construction is booming but economists warn there's not enough investment. Source: DPA

“You can be right with a bad prediction,” German economist Stefan Kooths says, “And you can be wrong with a very good prediction.”

Mr. Kooths, the head of forecasting at the Kiel Institute for the World Economy, or IfW, in northern Germany, explains that predicting gross domestic product (GDP) too early on isn’t good. It draws too much public attention. Quality forecasts can only be made by looking at basic assumptions and predicted drivers of growth.

Nonetheless, 2016 was a good year for economic forecasters. “The institute’s overall forecast narrative largely happened as predicted,” said Ferdinand Fichtner, of the German Institute for Economic Research, or DIW, a Berlin-based research body.

The institute forecast relatively strong domestic demand, supported by low inflation, and comparatively weak growth in the world economy. Mr. Fichtner admits it was partially luck. “We forecasters are good at describing the continuation of existing trends, and 2016 was a year where trends continued,” he explained.

Forecasters are less adept, he added, at predicting turning points in the economy, or incorporating political developments into the economic picture. 2017 is proving to be a more difficult year in comparison, especially considering U.S. President Donald Trump’s economic policy plans, which still remain unclear.

 

Forecasts of the research institutes for 2016 and actual results

“Again last year, the biggest disappointment was companies’ investment in plant and equipment,” said Roland Döhrn, head of forecasting at the RWI – Leibniz Institute for Economic Research, based in Essen. Mr. Döhrn compared all the 2016 forecasts from the major research institutes.

His research established that until well into 2015, a majority of forecasters were assuming a “normal” economic upswing with high growth in investment. Even though prediction professionals gradually reduced expectations, even later forecasts for 2016 still overshot in growth forecasts.

“It’s a bubblegum recovery,” said Mr. Kooths. This is now extending into a fourth year, but the usual model, in which companies’ strong investment growth becomes the main driver, is not taking place this time. “This upswing is very different to the kind we had in the past, because industry is hardly contributing,” said Mr. Wollmershäuser, from the Ifo Institute for Economic Research. “The main drivers have been increased inward migration and a construction boom driven by low interest rates.”

“Time and again we make the error of assuming that political uncertainty will disappear, so that companies will invest more,” explained Mr. Fichtner, from the DIW. “For the current year, we will not make this mistake again.”

The prevailing view among forecasters is that domestic demand will not grow as strongly this year, because of its previous drivers, such as inward migration, state spending, and private consumption, losing momentum. Mr. Fichtner also thinks the increase in employment will slacken over the course of 2017.

In February, the mood among exporters increased 2.5 points to 14.6 balance points. This means many companies are actually expecting an increase in export sales, and not merely trusting forecasts of the opposite. “Thanks for all this has to go to Donald Trump and the European Central Bank,” said Mr. Wollmershäuser, the Ifo economist. He added that Mr. Trump’s economic policy and the ECB’s low interest rate policy underlay the current weakness of the euro.

However, the forecasters are optimistic about the world economy. They suggest it is set to grow and for Germany, this would mean stronger exports compensating for weaker domestic demand.

Considering an already high trade surplus, a boom in exports may only stand to fuel Mr. Trump’s arguments that the European Union is just a vehicle for Germany, said the DIW’s Mr. Fichtner.

 

Norbert Häring writes about monetary policy, exchange rates, credit markets and the latest developments in economics. To contact the author: haering@handelsblatt.com

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