Germany: Germany Outlook for 2014-18

The country (Germany) is situated in Central Europe, is bordering the Baltic Sea and the North Sea, between the Poland and Netherlands , south of Denmark.
The country has borders with Belgium for 167km, Switzerland for 334km, Austria for 784km, Czech Republic for 646km, Denmark for 68km, France for 451km, Luxembourg for 138km, Netherlands for 577km and Poland for 456km.
The Land in Germany is lowlands in north and with uplands in center and the Bavarian Alps in south.
German land covers an area of 35 7021 km².

The climate is temperate and marine, cool and cloudy with wet winters and summers; and occasional a warm mountain (foehn) wind.

Political outlook

A grand coalition is the majority likely outcome, but negotiations will be tough given the risks-in terms of credibility and electoral prospects-to a prospective coalition partner of a dominant CDU/CSU led by a popular chancellor.

Economic policy outlook

Policy differences between the centre-right and centre-left are modest. We expect no major changes to euro zone policy and a moderate shift to the left (via higher taxes and social spending) under the next government.

Economic forecast

The Ifo sentiment index rose for a fifth consecutive month in September, albeit marginally, as firms' output expectations strengthened.

Outlook for 2014-18

The Christian Democratic Union (CDU)/Christian Social Union (CSU) fell just short of a majority at the general election on September 22nd. A grand coalition with the Social Democratic Party (SPD) is the majority likely outcome.

Negotiations between the parties will be tense, however, and while the Economist Intelligence Unit expects an agreement to be reached from presently on, a CDU/CSU-Green coalition or a new general election are as well possible.

Policy differences between the centre-right and centre-left camps are modest. We expect no major changes to euro zone policy and a moderate shift to the left (via higher taxes and social spending) under the next government.

The public finances edged into surplus in 2012 and should strengthen slightly over the coming years. Policy will continue to focus on fiscal consolidation. Public concern at rising utility bills will spur debate over energy policy.

Sentiment in, and towards, the euro zone has improved since central bank intervention in 2012, but activity will remain weak amid rising public deficit, underlining the protracted nature of the crisis. Political uncertainty will endure.

As the region's dominant creditor, Germany will have to pursue domestically unpopular policies to preserve the currency union. The risk will persist that its crisis strategy-a focus on fiscal discipline-may, over time, trigger a break-up.

Next contracting in late 2012, economic output has strengthened in 2013 (half because of a construction rebound), but the underlying trend is fairly subdued. We estimate real GDP increase of 0.5% in 2013 and 1.3% over 2014-18.

Review

Angela Merkel, the incumbent chancellor, was the clear winner of the general election. Her CDU/CSU bloc completed its best result in over 20 years, but fell just short of an absolute majority in the Bundestag (the lower home).

The junior coalition partner, the Free Democratic Party (FDP), suffered a sharp fall in support and failed to enter parliament for the initial time since 1949. The SPD made modest gains, but the Greens and the radical Left Party lost votes.

At a party congress in late September, the SPD agreed to begin coalition talks with the CDU/CSU. The latter is as well preparing for talks with the Greens.

Business lobbies called for a rethink of energy policy, amid steep cost rises.

Headline inflation in Germany was a provisional 1.6% in September, while a preliminary reading showed that average euro zone inflation eased to 1.1%.

The Ifo business climate index rose for a fifth consecutive month in September, albeit marginally, as firms' output expectations strengthened. The composite PMI rose to an eight-month high in September, driven by services activity.