Strong domestic demand to drive German growth: finance ministry report

[BERLIN] Growing domestic demand in Germany and public spending on refugees is set to underpin growth in Europe's biggest economy this year, offsetting a decline in exports hit by global economic weakness, the Finance Ministry said on Friday.

The German government expects private consumption to rise by 1.9 per cent this year in real terms, the ministry said in its February report. Tax revenues rose 3.7 per cent in January to 22.1 billion euros (S$34.4 billion) from the same month last year.

Germany took in 1.1 million migrants last year, many of them fleeing war and poverty in countries such as Syria, Iraq and Afghanistan. The government will spend last year's entire budget surplus of 12 billion euros on accommodating and integrating them but has ruled out raising tax to cover the costs.

"Private and public consumption will probably continue to rise against the background of the ongoing increase in employment and the demands of migration," said the report.

According to documents seen by Reuters on Thursday, the ministry estimates additional federal spending of 10.7 billion euros in 2017, mostly to cover migrant-related costs.

Nevertheless, Finance Minister Wolfgang Schaeuble aims to maintain a balanced budget every year until 2020.

A poll by the influential Ifo institute showed four in 10 German economists think the influx of migrants will be a drag on the economy with only 23 per cent viewing them as beneficial, with 37 per cent undecided.

Meanwhile, exports are suffering from sluggish global growth and economic, as well as political, uncertainty.

Exports started declining in the middle of the year and shrank 1.5 per cent in the last quarter from the third quarter, although they grew 6.4 per cent in 2015 overall.

"Developments in foreign trade will largely depend on a recovery in the global economy, especially further developments in emerging markets and the United States," the report said.

Risks related to foreign trade also dampened the mood among some German companies and industrial activity also decreased significantly in the fourth quarter.

But full order books and rising revenues in December point to an upswing in the industrial sector in the spring, the ministry said.

It also said that the labour market was "exceptionally positive", with employment rates rising and companies expanding their payrolls.

It expects this positive trend to continue but also said that the integration of refugees into the job market would gradually push up unemployment rates.

The Organisation for Economic Cooperation and Development (OECD) earlier cut its forecast for economic growth in Germany to 1.3 per cent for this year from its previous estimate of 1.8 per cent.

REUTERS