Economic growth is projected to strengthen in 2016, as a robust labour market, low interest rates and low oil prices underpin private consumption. Weaker demand from emerging market economies will gradually be offset by stronger exports to other euro area economies. Business investment is expected to recover with rising capacity utilisation. The refugees with prospects to stay durably will enter the labour market gradually and can help reduce the impact of demographic change in the medium term. The unemployment rate will remain historically low. The current account surplus will narrow somewhat but will remain very high.
The budgetary stance is expansionary, which is appropriate to make room for nearterm spending priorities related to structural reforms to raise inclusive growth and wellbeing and to address the needs related to the inflow of asylum seekers. Efforts to facilitate the integration of the new immigrants are needed to allow them to better integrate into German society and improve their employment prospects. More support is needed for youth with weak socio-economic background in the education system. Better childcare and lower taxation on second earners would increase options for women who wish to work longer hours. Removing barriers to competition in services would strengthen innovation and investment, and could reduce Germany’s big external imbalance.
Steps to eliminate tax expenditures for activities that have high CO2 emission intensity, and to align taxation of fossil fuels with their carbon content, would help Germany to reach its emission-reduction targets in a cost-efficient way. To reduce the energy intensity of the economy, exemptions for energy-intensive industries should be phased out, tax breaks for company cars and commuting allowances abolished, and taxes on diesel raised to those on petrol. The government should use its influence to ensure that EU standards on emissions of transport vehicles are more effective in reducing emissions.