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Growth is projected to ease somewhat but still remain solid and employment is set to expand further. Stronger activity in the euro area is boosting exports and business investment, but euro appreciation and higher wages may dent competitiveness. Low unemployment and wage gains underpin private consumption, but are also raising consumer price inflation. Low interest rates and strong housing demand, partly due to immigration, sustain residential investment. The current account surplus will fall somewhat, but will still remain high.
Fiscal policy is mildly supportive of growth, but the budget balance will remain in surplus. The supply of childcare and full-day primary schools needs to expand and infrastructure needs to be modernised. There is scope to shift the tax burden from wage income to environment and real estate taxes. Taxes on second earners should be lowered. These steps would strengthen inclusive, green growth.
Private and public indebtedness are modest. However, house prices have risen, especially in major cities. So far the rise is mostly in line with higher household incomes, lower interest rates and immigration. The authorities need to be ready to apply macro-prudential tools which would specifically address risks in case house prices and mortgage lending accelerate. More demanding leverage requirements on banks would reduce risks, improve the efficiency of lending and strengthen inclusiveness.
Economic Survey of Germany (survey page)