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Markus Demary / Michael Grömling / Galina Kolev IW-Trends No. 1 11. April 2018 Approaches for Determining Aggregate Capacity Utilisation: Has the German Economy Reached its Limit?

The current robustness of the German economy has triggered a debate about the risk of overheating. High utilisation of aggregate production capacity does not necessarily mean an economy is overheating.

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Has the German Economy Reached its Limit?
Markus Demary / Michael Grömling / Galina Kolev IW-Trends No. 1 11. April 2018

Approaches for Determining Aggregate Capacity Utilisation: Has the German Economy Reached its Limit?

IW-Trends

German Economic Institute (IW) German Economic Institute (IW)

The current robustness of the German economy has triggered a debate about the risk of overheating. High utilisation of aggregate production capacity does not necessarily mean an economy is overheating.

For a correct diagnosis, capacity utilisation must be measured by means of a projection of gross domestic product and of potential output. The following article outlines a number of approaches that attempt to estimate the potential utilisation of the economy as a whole. Estimates of potential growth and the output gap using a Hodrick-Prescott filter suggest that in recent years, rather than overheating, the German economy has seen accelerating potential growth. Estimates based on growth accounting, on the other hand, show high utilisation of production capacities. The forecast by Oxford Economics using the Oxford Economics Global Economic Model also points to very high levels of capacity utilisation. Finally, the business cycle survey conducted by the Institute of the German Economy (IW) provides original evidence from companies on the utilisation of production capacities. In their responses, a good third of German companies speak of an overload. This results particularly from supply side factors such as the shortage of skilled staff, which is a structural rather than a cyclical problem. Policymakers should therefore not continue their endeavours to add momentum to the economy by increasing demand, but rather widen the opportunities for future growth with an economic policy that expands potential capacity.

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Has the German Economy Reached its Limit?
Markus Demary / Michael Grömling / Galina Kolev IW-Trends No. 1 11. April 2018

Markus Demary / Michael Grömling / Galina Kolev: Ist die deutsche Wirtschaft am Limit? Ansätze zur Bestimmung der gesamtwirtschaftlichen Kapazitätsbeanspruchung

IW-Trends

German Economic Institute (IW) German Economic Institute (IW)

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Jürgen Matthes / Michael Grömling / Markus Demary / Björn Kauder / Berthold Busch / Gero Kunath / Thomas Obst External Publication 25. October 2023

Why Price Stability Matters

As of March 2023, overall infation is declining in Europe. However, core infation levels continue to remain well above the 2% mandate of the European Central Bank (ECB). In fact, the current bout of infation should continue to weaken as and when supply-chain ...

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Michael Grömling / Michelle Koenen / Gero Kunath / Thomas Obst / Sandra Parthie in Intereconomics External Publication 17. October 2023

Deindustrialisation – A European Assessment

The war in Ukraine has exacerbated pre-existing production problems in manufacturing networks originating from the coronavirus pandemic. Material shortages are compounded by uncertainties about sufficient energy supplies.

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