The German government economic advisers have increased their growth forecasts for the country’s economy. However, they believe that there are risks to maintaining the positive trend, stemming mainly from the danger of a protectionism spiral.
The members of the group, also called the “Five wise men”, said that their forecast for gross domestic product is from growth of 2.3% this year, which is 0.1% more than their previous forecast in November. For the next 2019, they expect a slightly lower growth rate of 1.8%.
The Ifo Institute even presented even more optimistic forecasts. Its researchers confirmed their expectations in December for an increase of 2.6% in 20178 and 2.1% in 2019.
“The huge cuts in US income taxes, as well as robust economic developments in the Eurozone, stimulate the demand for German goods and services”, says the Ifo report.
According to economists in the group, the trade will begin to play a slightly larger role as a driver of growth than has been expected so far thanks to a thriving global economy. The more lenient financial policy of the European Central Bank, as well as Berlin’s plans to increase government spending, will be additional incentives.
However, the advisers warned that the German economy faces more and more risks from abroad, including the results of the Italian parliamentary elections, the uncertainty surrounding the Brexit talks and the US-designed tariffs on some imported goods.
“Spiraling from protectionist measures will have a clear negative impact on the world economy and the German economy”, they said. The “five wise men” also said that German companies are facing more capacity constraints, with a shortage of staff likely to shrink future growth.
Ifo also warned for the negative influence of tariffs, as well as the depreciation of the Euro, the diminished confidence among companies. The Institute also indicated that the coalition agreement between Chancellor Angela Merkel’s conservatives and the German Social Democratic Party had a temporary stimulus for the economy as the two political parties agreed to increase government spending. However, according to experts, the planned tax reform in the country is disappointing and the response to the substantial cuts in US corporate tax, as well as those in France and the UK, is still needed.