February 7, 2018 / 9:07 AM / in 9 months

German economy to grow by 2.7 percent this year: DIHK

BERLIN (Reuters) - The DIHK Chambers of Industry and Commerce on Wednesday raised its 2018 growth forecast for the German economy to 2.7 percent from 2.2 percent, providing a bullish outlook for Europe’s biggest economy despite weaker output at the end of last year.

FILE PHOTO: A container ship is loaded at a terminal in the harbour of Hamburg, Germany September 23, 2012. REUTERS/Fabian Bimmer/File Photo

The forecast was published before German Chancellor Angela Merkel’s conservatives and the Social Democrats (SPD) on Wednesday agreed to a coalition deal after months of uncertainty.

The German economy is enjoying a consumer-led upswing due to record-high employment, increased job security, rising real wages and low borrowing costs. The upturn has recently been strengthened by a rebound in exports and company investments.

“Companies have never been more upbeat,” DIHK said in its latest business survey which showed business morale improved further at the beginning of 2018 despite a stronger euro.

German firms are hiking investment plans at an unprecedented pace as many reach capacity bottlenecks and a lack of skilled labor threatens to choke off more growth, DIHK said.

According to the DIHK survey of 26,000 managers, business morale regarding current conditions reached a record-high as 54 percent of firms reported good conditions, 40 percent said things were satisfactory and 6 percent said things were bad.

Asked about the biggest threat for future growth, most companies pointed to shortages of skilled labor and rising labor costs. “The shortage of skilled labor is turning into a real obstacle for future growth,” DIHK said.

DIHK economist Sophia Krietenbrink said most managers were unfazed by the recent appreciation of the euro, with only 13 percent describing it as a risk for future growth. This was down from 18 percent in DIHK’s autumn survey.

The upbeat forecast came shortly after data released by the Federal Statistics Office showed on Wednesday that factories shifted into a lower gear at the end of 2017 with industry output falling more than expected in December.

Industrial production edged down by 0.6 percent after rising by an upwardly revised 3.1 percent in November, the Statistics Office said. The December reading compared with the mid-range forecast in a Reuters poll for a fall of 0.5 percent.

Capital Economics analyst Jennifer McKeown said the drop was very unlikely to mark the start of a downward trend.

“The outlook for industry and the economy as a whole remains positive,” McKeown said.

A breakdown of the data, provided by the Economy Ministry, showed that factories produced fewer capital goods and consumer goods while they churned out more intermediate goods. Construction activity was also feeble.

From October to December, industrial output rose by 0.7 percent. “The fourth quarter was significantly weaker than the previous three quarters,” the ministry said.

“Nonetheless, the trend in output is clearly pointing upwards and with the strong order intake in December and good sentiment, strong industrial activity is expected over the coming months,” the ministry said.

Industrial orders posted a stronger-than-expected rise of 3.8 percent in December and business morale in January jumped back to reach November’s record high.

The government expects the economy to grow by 2.4 percent this year after expanding by 2.2 percent in 2017, which was the strongest rate in six years.

Reporting by Michael Nienaber; Editing by Raissa Kasolowsky and Alison Williams

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