Smooth sailing for the German tanker | Business| Economy and finance news from a German perspective | DW | 29.12.2015
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Smooth sailing for the German tanker

What will the new year bring for the economy in Europe's powerhouse? Which sectors will be smiling? Which will be grumbling? The Cologne Institute for Economic Research (IW) has been looking for answers.

For the last 40 years, the Institute for Economic Research (IW) in Cologne has conducted surveys of trade associations' thoughts on the general state of German business, production, investment and employment for the coming business year. Over 40 industry organizations participate in IW's survey.

"These industries do indeed represent the breadth of the German economy, and thus make annual comparisons possible," says IW Director Michael Hüther. If one compares the latest figures with those of the two preceding years, one could say that the image that emerges is like that of an enormous tanker that is maintaining its course. "It is not gaining any new momentum, but it isn't losing any either," Hüther tells DW.

Hence, a cautiously optimistic picture for the coming year. Twelve associations certify that things will improve in their particular industry, 13 say that things will get worse. A similar balance can be seen with employment: 12 associations are counting on hiring more workers, but 12 are counting on hiring less; 17 associations see room for more in investment in 2016, only 5 see less scope. The banks have it especially hard, says Hüther, "because there are immense costs tied to regulatory requirements. And low interest rates are shrinking profits."

More production

The prognoses for production are predominantly positive: 29 industries are counting on increased production among their businesses, only seven predict a decline. The craft, retail and hospitality sectors stand to profit handsomely from strong domestic demand:

"People have purchasing power, jobs are safe and inflation is close to zero. That is when people like to spend money," says IW Director Hüther.

The picture is a bit more mixed for export industries. The chemical and electronics industries will remain stable, but will not see any new impulses. The automotive industry - despite VW's "dieselgate" emissions scandal - is extremely optimistic. Hüther explains why.

"2015 was the first time in 10 years that increases in domestic production outpaced growth in foreign-based production. That shows that increased domestic demand can in fact be important for export industries because they can serve domestic as well as foreign markets."

Integrating refugees takes time and money

The construction industry is being fueled by the real estate boom, but it is already suffering from a shortage of skilled labor. Refugees will offer no quick help on that front, says Hüther, because they will only be available to the job market when their legal status as such is acknowledged. Then language skills and training must be completed, which could take four or five years.

IW's Michael Hüther

Michael Hüther says Germany's economic development is bound to remain stable

"We shouldn't lie to ourselves. Integration requires a lot of time and money."

German business is making a great contribution by offering internships and employability testing, but at the same time Hüther says that the unpredictability of the refugee crisis makes companies cautious. However, he says their biggest concerns have to do with the dynamism of emerging markets that have helped the German economy expand over the past two decades. There are serious doubts about whether this can continue, especially in China's case.

"How can the development model of such an enormous national economy be successfully transformed? India still has substantial problems. And Russia is under twofold pressure due to sinking oil prices and sanctions." Brazil and Turkey also have tough times ahead.

New concerns about emerging markets, refugee integration and the latest terror attacks have replaced old worries about Greece and Ukraine. To put it another way: The German economy will remain robust, but there are new trouble spots abroad. IW Director Michael Hüther sees things similarly:

"Overall, one is tempted to say that the tanker is cruising. It is very robust, and it is maintaining its course and speed. What is happening out there on the world's oceans is being registered with concern, but it can be dealt with."

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