Country Report Germany

Outlook for 2008-09

• Despite rising tensions between the partners in the ruling grand coalition, the Economist Intelligence Unit expects the incumbents to remain in office until the next scheduled election in September 2009.
• Reform momentum is slowing. Few new liberalising initiatives can be expected before the next federal election as voters become increasingly hostile to further reform. Some backtracking is likely.
• The most likely outcome of the 2009 election is the re-election of the chancellor, Angela Merkel, although her coalition partner may change.
• Germany's position within the EU is likely to remain strong, even if differences with France on some issues will continue. Relations with the US will remain good, while those with Russia are likely to be fraught.
• The general government deficit disappeared in 2007. Small surpluses are forecast in 2008-09.
• Economic growth is expected to slow from 2.5% in 2007 to 1.9% in 2008, before rebounding to 2.2% in 2009. We expect private consumption to make a stronger contribution to growth in the outlook period than in the recent past.
• Against a background of large global imbalances, the downside risks to our export projections over the outlook period are considerable.

Monthly review

• In late May the governing coalition suffered turbulence when the SPD nominated its own candidate for next year's presidential election. The out-of-the-blue nomination has further eroded trust between the coalition partners.
• New official budget forecasts have revised down tax revenue growth slightly in 2008 and 2009. Despite this, the budget is expected to see larger surpluses this year and next. With full coffers, calls for tax cuts have grown louder.
• Germany's first-quarter GDP growth grew by 2.6% year on year. Stronger private consumption, higher investment spending and exports contributed to a rate of expansion that was more rapid than anticipated.
• Forward-looking indicators and surveys continue to suggest that the economy will grow solidly over the remainder of 2008, even if the gradual downward trending of economic growth should continue over 2008.
• Employment growth remained stable in the first quarter of 2008 compared with the average registered in 2007. Total employment reached 40.2m in the first quarter, up by 689,000, or 1.7%, year on year.

SOURCE: Country Report