Relaymedia

Consumers and Refugees Seen Driving German Growth, Offsetting Weaker Demand From China

The German government expects strong private consumption and increased state spending on refugees to drive growth in Europe's largest economy this year and next, offsetting weaker demand from China and other emerging markets.
Migrants queue in the compound outside the Berlin Office of Health and Social Affairs (LAGESO) as they wait to register in Berlin, Germany, October 12, 2015. REUTERS/Hannibal Hanschk

The German government expects strong private consumption and increased state spending on refugees to drive growth in Europe's largest economy this year and next, offsetting weaker demand from China and other emerging markets.

Record-high employment, rising wages and nearly stable prices are boosting household spending while cheaper gasoline is freeing up some cash for other purchases.

At the same time, record numbers of people, fleeing war in the Middle East or seeking prosperity, are arriving in Germany. The federal government and states are spending 10 billion euros ($11 billion) on accommodating the new arrivals, integrating them and finding them jobs.

"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 on Wednesday, adding that this was an investment in Germany's future given its ageing population.

He said consumer spending would continue to be the main prop for the economy, which was on a solid growth track despite the subdued global outlook.

The government slightly lowered its 2015 growth forecast to 1.7 percent, from the 1.8 percent it predicted in April, but confirmed its estimate for a 1.8-percent expansion in 2016.

The economy ministry expects domestic demand to rise by 1.7 percent this year and 2.1 percent next year.

It revised up its estimates for government spending to an increase of 2.3 percent this year and a gain of 2.0 percent next year, mainly due to higher spending for refugees.

The influx of refugees is also expected to affect the labor market, with the ministry saying employment would rise to a record-breaking 43.3 million next year, though the new arrivals will likely push up unemployment by 60,000 in 2016.

Turning to foreign trade, Gabriel said German companies were still benefiting from a weaker euro, making their goods cheaper for customers outside the currency bloc.

The ministry estimated exports would surge by 5.4 percent this year and 4.2 percent next year but imports would rise even more strongly.

That means foreign trade will only make a small contribution to growth this year, leaving domestic demand as the economy's only pillar next year, it says.

The government expects consumer prices to rise 0.3 percent this year and 1.1 percent next year - far lower than the European Central Bank's target for the euro zone of just below 2 percent.

Gabriel said he was not concerned about Germany slipping into deflation despite annual inflation turning negative in September for the first time in eight months.

(Additional reporting by Gernot Heller; Editing by Paul Carrel/Ruth Pitchford)