monetary policy

The dark side of Germany's economic boom

German Train Drivers To End Strike
The ECB: lighting up the German economy. Source: Bloomberg

Jürgen Abromeit doesn’t need data or surveys to figure out how the German economy is doing. The chief executive of INDUS, a holding company that invests in German mid-sized companies, just has to talk to managers at the more than 40 businesses in which he owns shares. “We’re heading for our fifth consecutive record year, with sales, profits and employment at an all-time high,” Mr. Abromeit said.

For the record, the survey data confirms his optimism: An exclusive survey of over 600 companies, conducted by the Munich-based Ifo Institute for Economic Research on behalf of WirtschaftsWoche, found that a majority expect the upturn to continue over the next year. One in 14 companies even expected their current rate of growth to accelerate year-on-year. Managers have therefore increased their investment budgets and expanded plans to take on new staff.

Analysts at banks and other institutions are also optimistic. Economists have raised their growth forecasts significantly in recent weeks, with some predicting growth in German GDP of as much as 2.6 percent for 2018 (see graphic below). Although many believe growth could slow somewhat in 2019, they still expect the pace to be higher than when capacity utilization is at a normal level.

For eight years, Germany’s economy has been expanding while unemployment has been falling and incomes and tax revenue have been rising. All the while, consumer prices have risen modestly. For the country once famously labeled the sick man of Europe, it’s been an impressive revival. But that doesn’t mean the good times will continue forever. In fact, many economists are starting to issue a warning: Don’t be dazzled by Germany’s new economic miracle.

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