Service providers in Berlin give boost to East German economy – implications of the Joint Economic Forecast and of official data on the East German economy in 2018

In its spring report, the Joint Economic Forecast group states that the upturn in Germany came to an end in the second half of 2018, mainly because the manufacturing sector is weakening due to a slowing international economy and to problems in the automotive industry. Accordingly, in places such as Saxony (1.2%), Thuringia (0.5%), and Saxony-Anhalt (0.9%), where manufacturing plays a particularly important role, gross domestic product (GDP) grew less than in Germany as a whole (1.4%).

Authors Oliver Holtemöller

"Still, growth in East Germany was, with 1.6%, a bit higher, because the econ­omy in Berlin expanded by 3.1%", says Oliver Holtemöller, Head of Department Macroeconomics and Vice President at the Halle Institute for Economic Research (IWH). During the whole upswing between 2014 and 2018, production in East Germany has expanded somewhat faster than the German economy due to the high growth dynamics of service providers in Berlin.

For 2019, the institutes forecast an increase in German GDP by no more than 0.8%, mainly because international sales prospects have deteriorated. The economy is supported by consumer-related services, which benefit from the significant increase in disposable income. This is particularly true of East Germany, as unemployment is falling faster in the West. In addition, growth momentum in Berlin is likely to con­tinue. However, many East German companies find it increasingly difficult to expand production because in this region, skilled labour is, for demographic reasons, par­ticularly scarce. Therefore, East German employment has recently slowed down by more than in the rest of the country.

All in all, IWH forecasts that the East German economy (including Berlin) will grow by 1.0% in 2019 (Germany: 0.8%), after 1.6% in 2018 (Germany: 1.4%). In the following year, East German production is expected to expand by 1.6% (Germany: 1.8%). According to the definition of the Federal Employment Agency, the unemploy­ment rate should fall from 6.9% in 2018 to 6.4% in 2019 and 6.3% in 2020 (Ger­many in 2018: 5.2%, 2019: 4.8%, 2020: 4.6%).

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The German economy has cooled noticeably since mid-2018, and the long-term upswing has thus apparently come to an end. This weaker momentum was triggered both by the international environment and by industry-specific events. The global economic environment has deteriorated – due in part to political risks – and the manufacturing sector is struggling with obstacles to production. Germany’s economy is currently going through a cooling-off phase in which capacity shortages in the economy as a whole are declining. The institutes expect economic growth of only 0.8% in 2019, which is more than one percentage point less than in autumn 2018. However, so far they consider the chance of a pronounced recession with negative rates of change to gross domestic product (GDP) over several quarters to be slight – at least as long as the political risks do not intensify further. For the year 2020, the institutes confirm their forecast from last autumn: gross domestic product is expected to increase by 1.8%.

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