Country Report Germany July 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 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, 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. Small surpluses are forecast in 2008-09.
• Economic growth is expected to slow from 2.5% in 2007 to 1.9% in 2008 and 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

• The 2009 budget foresees public spending growing by less than 2%. This and other developments strongly suggest that a reversal of the government's budgetary reform process is unlikely.
• Kurt Beck, the leader of the SDP, the junior coalition partner, has recognised that he will not automatically be the party's candidate for chancellor at the next election. The foreign minister, Frank-Walter Steinmeier, is the alternative.
• The German government in late June backed a decision by the EU further to tighten sanctions on Iran in order to put pressure on the country over its nuclear programme.
• The budgetary returns for the first quarter of 2006 showed that revenue increased by 4.5% year on year, while expenditure rose by only 0.5%. As a result the balance moved further into the black.
• Inflation, as measured by the EU's harmonised index, increased to 3.1% in May and (according to preliminary data) to 3.4% in June. This is the result of high food and energy costs and in spite of still-moderate wage increases.
• Year-on-year growth of German exports slowed from 8.5 % in 2007 to 7.3% in the first quarter of 2008 (seasonally adjusted) and to 6.7% in April.