Downside risks to German economic outlook return post Brexit vote

Germany’s trade and investment are expected to soften in 2016, in spite of a strong start to the year, given the Brexit referendum outcome. But the underlying strength of German economy is expected to continue to shield the nation from subdued conditions abroad, noted Societe Generale in a research report. Therefore the impact is likely to be manageable.

Moreover, the public finances of the country continue to be strong, permitting Germany to execute fiscal easing if required. On the long-term prospective, reforms to underpin service market deregulation and investment are still required, while pressures are expected to increase more after the Brexit vote.

The German economic growth is still anticipated to decelerate in the second quarter, partially in reaction to the robust growth recorded in the first quarter. However, the uncertainty shock post Brexit and a reduced external demand are expected to subtract about 0.2 percent points from the German economic growth. The nation’s GDP is likely to grow 1.6 percent in 2016, a tad slower from 2015, according to Societe Generale.

The economy will continue to be predominantly driven by domestic demand in 2016, whereas net trade might be a major drag on the overall economic growth. The labor market remains robust, while the projections for wage are widely balanced. The German economy, as before is anticipated to expand at a more rapid rate than potential in 2016 and 2017, before slowing with likely recession in the US in 2018-2019, noted Societe Generale.

The new growth path suggests a lower optimistic output, increase to about 0.5 percent next year. This might moderate wage growth pressures slightly; however, the rise in headline inflation is still likely to result in higher wage growth. The headline inflation is likely to converge with core inflation in 2016 as the impacts of lower oil prices diminish.

“Annual headline inflation should rise by 0.5 percent this year and by 1.6 percent next, with core inflation rising by 1.2 percent and 1.3 percent respectively,” added Societe Generale.