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.
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.
- Markus Demary / Michael Grömling / Galina Kolev ·
- IW-Trends No. 1 ·
- 11 Apr 2018