Country Report Germany August 2008

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 has slowed. Few new liberalising initiatives can be expected before the next federal election, as voters become increasingly hostile to further reform. Some backtracking is likely, but it will be marginal.
• 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. As a result of continued tight expenditure controls, small surpluses are forecast in 2008-09.
• Economic growth is expected to slow from 2.5% in 2007 to 1.9% in 2008 and 1.6% 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

• The chancellor, MsMerkel, has rebuffed populist proposals by members of her own party and her coalition partner. Fiscal consolidation remains her top priority, as evidenced by an austere budget for 2009.
• MsMerkel and the SPD finance minister, Peer Steinbruck, together continue to form a bulwark against a reversal of the painful consolidation process that has taken place in recent years.
• The 2009 budget foresees a slight increase in revenue and current spending, both of 1.8%, and is predicated on the conservative assumption of real GDP growth of 1.2%. The federal budget will still be in deficit, but this will fall.
• On July 16th the cabinet finalised the details of two bills on sectoral minimum wage regulation. Up to 4m workers could be affected by the new legislation.
• Germany's annual inflation remained at a 14-year high of 3.3% for a second successive month in July, according to preliminary data from six states. In month-on-month terms, prices rose by 0.6%.
• Manufacturing output grew quite strongly up to April, but growth fell in May.