Outlook 2018 with or without the Grand Coalition (GroKo)

For several weeks the leaders of the CDU/CSU and the SPD have been wrangling with themselves and with each other, and now the exploratory talks have produced a result. This consists mainly of welfare-policy goodies that are to be showered on the country. The Social Democrats have clearly got their way in many things albeit without their being able to push through main demands for a ““Citizen’s Insurance“ (Bürgerversicherung) and the “United States of Europe.” Nevertheless, the result is already on the brink as the SPD grass roots, which until recently were geared up to sit on the opposition benches, will possibly not go along with the party leadership. If the special party congress to be held next Sunday rejects the outcome of the talks, there will presumably be new elections and the SPD will have to look for a new Chairman.

What does all this mean for the Economic Outlook for 2018? Not much in the immediate future at least. The German economy has shown that over the shorter term at least it is not dependent on a functioning government. Coalition formations do not excite the companies at least not as long as democratic parties make up the overwhelming majority in the Parliament. This is also unlikely to change with new elections.

We are, therefore, optimistic for the German economy in 2018, which will probably already be the ninth consecutive year of economic recovery. For the coming year we expect similarly strong economic growth as in 2017. Gross domestic product will probably increase by 2.2 per cent in 2018, in other words similarly dynamically to what we saw in 2017. The inflation rate still remains moderate despite increasing capacity utilisation and the growing lack of skilled workers.

A sustained uptrend in the German job market creates the basis for a sustained and strong economic recovery in 2018 as job creation is causing real incomes to rise and is allowing households to step up their consumer spending. This is also reflected in recent surveys: consumers were in high spirits at the turn of the year 2017/2018 – as were German companies, too.

So whether the Grand Coalition comes or not will presumably play no major role for growth and employment in 2018. But in the medium and longer term it is naturally of great importance whether Germany is in a position to function. Europe will not wait for Germany, but without German help Europe will not be able to find its way out of the crisis. And without the right decisions being made, things will not always continue improving for the German economy, either.

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