Germany trims growth forecast but expects stimulus from refugees

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The German government trimmed its economic growth forecast for this year but Economics Minister Sigmar Gabriel said that spending on refugees should act as a stimulus for Europe’s biggest economy in 2016.

The nation’s economy will expand by 1.7 per cent in 2015 – down from the 1.8 per cent the government forecast in April, Gabriel said on Wednesday.

The lower growth forecast comes against the backdrop of a slowdown in the world’s leading emerging markets such as China, Russia and Brazil along with worries about the economic fallout from the Volkswagen emissions scandal.

The economy should regain momentum next year, to grow by 1.8 per cent, with private consumption and corporate investment emerging as the key driving forces behind growth, said Gabriel. The economy expanded by a 1.6-per-cent growth rate in 2014.

“The German economy continues to grow,” said Gabriel, who leads the Social Democrats, the junior member in Chancellor Angela Merkel’s conservative-led ruling coalition.

“Despite the subdued global economic outlook with weaker growth in China and resource-rich emerging economies, the economy remains on the right track,” he said.

But after falling by 98,000 this year, Berlin is also projecting a rise of 60,000 in the number out of work as a result of the mass influx of refugees into the country, which Gabriel described as the country’s greatest challenge.

Still, Gabriel believes that Germany’s healthy growth prospects will help the nation to integrate the refugees, which some state governments expect to top 1 million this year.

Gabriel went on to say that the public sector spending resulting from the surge in asylum seekers would also help to boost economic growth.

“When it comes to refugees, the billions of euros we are planning to invest in education, kindergartens and schools will of course have an effect like a small stimulus package,” Gabriel said.

He said he expected the boost from spending on refugees to emerge in 2016 rather than in the current year.

The government released its latest forecasts in the wake of the scandal that has rocked German carmaker Volkswagen after the group admitted last month that its diesel-powered vehicles had been fitted with software aimed at cheating on emissions tests around the world.

The scale of the VW scandal had prompted concerns that the affair could cast a shadow over the whole of Germany’s manufacturing sector.

Expected loss of tax revenue for the state as a result of the VW-exhaust scandal were already taken into account.

But Gabriel insisted that the scandal was unlikely to have a lasting impact on the government’s economic forecasts, adding that the expected loss in tax revenue resulting from the affair had already been taken into account.

Berlin also believes the solid state of the labour market along with higher wages and weak inflationary pressures will result in private consumption rising 1.8 per cent this year and next.

Employment in Germany should hit a record high of more than 43 million, Gabriel said.

The strength of Germany’s domestic economy should also help to offset the more uncertain global economic outlook.

Corporate investment is forecast to continue the strong growth rate it chalked up last year to surge by 4.9 per cent this year and by 3.5 per cent in 2016.

Imports are expected to outpace exports resulting in trade making only a modest contribution to gross domestic product.

After rising by 5.4 per cent this year, exports are projected to slow to 4.2 per cent next year. Imports, on the other hand, will grow by 5.9 per cent in 2015 and by 5.3 per cent in 2016.

Germany’s leading economic think tanks last week also trimmed their growth forecasts.

Instead of the 2.1 per cent they forecast in April, the economic institutes said they now expect German growth to be 1.8 per cent in both 2015 and 2016.

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