Supported by an accommodative fiscal and monetary policy stance, the upturn in world trade and low energy prices, the economic upturn gained momentum at the beginning of the year. These favourable conditions should remain in place in the coming quarters. The economy should maintain its robust growth rate, largely driven by domestic demand. Shortages of skilled workers are likely to become more acute, which will drive up wage settlements and inflation. However, the low interest environment may create new risks, such as over-indebtedness, a misallocation of capital and overvalued asset prices.
The economic upturn gained momentum at the beginning of the year. Supported by buoyant activity in manufacturing, construction and business services, GDP – corrected for seasonal and calendar effects - rose substantially by 0.6% in Q1 from the preceding quarter, around twice as fast as the country’s potential growth rate. Business activity remained favourably oriented in Q2. The IFO climate index even reached 115.1 points in June, its highest level since German reunification in 1991. The favourable business climate is related to the confluence of several factors such as an accommodative monetary and fiscal stance, the upturn in world trade and low energy prices.
■ Sluggish investment
The loose monetary policy stance has resulted in a substantial weakening of the exchange rate. In 2016, the euro had depreciated by 17% against the dollar compared with two years earlier, allowing German enterprises to gain competitiveness in markets outside the eurozone and to increase profit margins. The EBITDA to sales ratio of listed German non-financial companies surged to 14.2% in 2016, whereas it had remained below 13% since 2011.
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by Raymond VAN DER PUTTEN