RaboResearch - Economic Research

Germany: growth continues

Economic Update

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  • We expect the German economy to grow by 1¾% in 2015
  • Falling inflation combined with high nominal pay rises will lead to a further increase in disposable income
  • The German government budget is likely to show a surplus again in 2015

Germany: moderate growth continues

The German economy closed 2014 with strong growth in the fourth quarter (0.7% q-o-q). After Estonia and together with Spain, Germany was among the best-performing eurozone countries in the fourth quarter. The growth in the fourth quarter was driven mainly by stronger domestic demand. Consumers increased their spending, and business investment also rose. There was also strong growth in investment in construction. This strong domestic dynamic led to higher imports, although exports grew even a bit stronger. Therefore, net exports contributed positively to GDP-growth in the fourth quarter.

Looking ahead, we expect robust domestic demand to continue to support growth (table 1). In 2015 private consumption will be supported by an expected strong growth in real disposable income. Private investment will once again be deferred due to increased risks, both in the eurozone (in Greece) and just outside (in East Ukraine for example). This will limit the growth of investment in the initial quarters. The fact that these developments have not yet been reflected in lower producer confidence is a surprise (figure 1). We should point out that these indicators gave a too optimistic view of economic developments in the years after the crisis. Over the longer term, rising demand both internally and abroad, in combination with relatively high levels of capacity utilisation will lead to increased investment. Exports will be supported by an increase in economic growth in the major trading partners and the lower euro.

Table 1: Forecast table Germany
Table 1: Forecast table GermanySource: Macrobond, Rabobank
Figure 1: Producer confidence is slowly increasing
Figure 1: Producer confidence is slowly increasingSource: Macrobond

Disposable income still rising

Concerns among German economists and policymakers that unemployment will rise as a result of the introduction of a statutory minimum wage would appear to be unfounded, at least for the time being. The unemployment rate (national definition) actually declined in January. Furthermore, many jobs classified as atypical (“mini-jobs”, for example) have been converted into regular employment (permanent contracts). The number of vacancies is also still rising. Tightness in the labour market is causing upward pressure on pay. Combined with inflation that given the current outlook for oil prices will be less than zero on average during 2015, this will lead to a strong increase in household spending power (figure 2). Given the high levels of the GFK consumer confidence sub-indices for willingness-to-buy and income expectations (figure 3), we expect private consumption growth to accelerate further in 2015.

Figure 2: Real disposable income continues to rise
Figure 2: Real disposable income continues to riseSource: Macrobond
Figure 3: Willingness-to-buy remains strong
Figure 3: Willingness-to-buy remains strongSource: Macrobond

Government budget in surplus again

According to the provisional financial statements for 2014, the German federal government achieved a balanced budget, against expectations of a EUR 6.5 billion deficit. The structural budget balance was slightly positive in 2014 (0.3% of GDP, see figure 4). The German Ministry of Finance also presented a balanced budget for the current year. The yields on German government bonds with terms to maturity of 6 years or less are now negative. Under the European and the German budgetary rules therefore, there is sufficient financial room for additional public investment. This has been deferred for several years, especially on education and infrastructure, which could negatively affect the growth outlook over time.

Figure 4: German government has fiscal room to boost the economy
Figure 4: German government has fiscal room to boost the economySource: Macrobond
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