The German economy is performing very well. Growth in 2017 and 2018 is likely to remain close to 1.8%. Germany’s outperformance vis-à-vis the eurozone is often attributed to the reform programme Agenda 2010. However, the fall in unemployment has been accompanied by a rise of the working poor. The German Social Democratic Party has signalled that it wants to correct some of the reforms, as these have led to less secure and badly paid jobs. This could open an interesting debate on social justice and equity.
Early data indicate that the German economy grew very rapidly in first months of 2017, supported by robust domestic as well as foreign demand. Industrial production, seasonally adjusted, recovered strongly after a sharp fall in December. By contrast, orders weakened substantially, after their strong surge in Q4 2016, although remaining on a rising trend. Moreover, construction activity rebounded in February following a cold weather-related fall in January.
The industrial sector is profiting from gains in competitiveness related to the weakness of the euro, whereas construction activity is supported by the strong demand for housing against the backdrop of low interest rates and favourable labour market conditions. Moreover, the recent upswing in world trade has made companies more confident about the short-term business outlook. The IFO climate index reached 112.3 in March, its highest level since July 2011.
GDP growth - on a working-day adjusted basis - should remain robust, at around 1.8% both in 2017 and 2018. Exports are set to remain an important driver supported by strong world trade and euro weakness. By contrast, domestic demand could become more sluggish, as private consumption growth eases largely because of the rise in energy prices. Moreover, lack of skilled staff has made companies reluctant to expand their installations. Other factors that have been weighing on capital spending are the unpredictable course of the new US administration, the triggering of article 50 by the UK government and the uncertainties surrounding the upcoming elections in France and Germany. Lastly, government spending is unlikely to increase rapidly after the election, as the major parties are in favour of pursuing a balanced budget policy.
Against this backdrop, the current account surplus is likely to remain above 8% of GDP, one of the largest in the world. The surplus is mainly against the US, the UK and the emerging economies including China. The surplus vis-à-vis the eurozone may shrink as German unit labour costs are outpacing those in the rest of the eurozone.
by Raymond VAN DER PUTTEN