Brighter German Economic Prospects Trigger Overheating Alarm

  • 2017 GDP seen rising 2.3%, exceeding potential growth of 1.4%
  • Research institute warns of misinvestments, asset bubbles

Germany’s economy is growing at its strongest pace since 2011 and accelerating -- and one of the country’s leading research institutes says that’s a problem.

The Kiel Institute for the World Economy predicted on Thursday that Germany’s expansion in gross domestic product will pick up to 2.3 percent in 2017 from 1.8 percent in 2015. With next to no slack and potential output growth at only 1.4 percent, Europe’s largest economy is poised to overheat, according to Stefan Kooths, head of the institute’s forecasting center.

“The economy is leaving its path of stability,” he said in a telephone interview. “We’re getting to the point where we’re overstretching our production capacities, which raises the risk of misinvestment and excess that will have to be corrected. In that sense, stronger growth is not good news.”

Germany’s impetus is fueled by ultra-cheap borrowing costs and a weak currency as the European Central Bank pumps cash into the euro area, which is struggling to sustain its recovery. More stimulus could be on the way -- with global trade threatened by a China-led slowdown in emerging markets, the ECB last week cut its economic outlook and held out the prospect of adding to its 1.1 trillion-euro ($1.2 trillion) asset-purchase program.

For Kooths, monetary policy is a “central problem” from a German point of view. 

“It will be much too expansionary for the German economy,” he said. “There’s room for discussion about whether Europe’s problems are of a monetary nature or whether ECB policy tends to mask more fundamental problems.”

Those remarks echo comments by German officials including Bundesbank President Jens Weidmann, who opposed quantitative easing, and Finance Minister Wolfgang Schaeuble. They’ve warned of the risks that too much monetary stimulus eases the pressure on governments to cut debt and rekindle growth through economic reforms.

“It’s undisputed that high global liquidity and debt promotes the willingness in the financial sector to take risks and leads to the danger of new bubbles, further debt and bad investments,” Schaeuble told German lawmakers on Tuesday.

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