RaboResearch - Economic Research

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Germany: higher growth, but the risks are increasing

Economic Update

  • We expect the German economy to grow by 1¾% in 2015 and 2% in 2016
  • The growth is broad-based: higher private and public consumption, investment and net exports are all contributing to the economic recovery
  • However, risks have increased. An escalation of the refugee problem, spread of the emission scandal at Volkswagen to other car manufacturers and more negative news on the performance of the Chinese economy could affect the solid base of the German economy

Growth forecasts

We expect the German economy to continue on its recent path of positive growth. In 2015 we are expecting economic growth of 1¾%, and 2% in 2016. The positive growth forecasts are backed up by numerous sentiment indicators (see Figure 1). The Economic Sentiment Indicator (ESI), the IFO Business Climate Indicator and the Purchasing Managers’ Index (PMI) are all pointing to continuing growth.

Table 1: Key figures Germany
Table 1: Key figures GermanySource: Macrobond, Rabobank
Figure 1: Sentiment indicators point to continuing economic growth
Figure 1: Sentiment indicators point to continuing economic growthSource: Macrobond

Broad-based growth

The economic growth is broad-based. Firstly, we expect private consumption in Germany to continue to increase by 2% in 2015 and 2016. Households are benefiting from the still low commodity prices (in particular, oil). Tightness of the German labour market has moreover exerted upward pressure on nominal wages, providing strong support to real household income (see Figure 2).

Figure 2: Strong increase in wages in real terms
Figure 2: Strong increase in wages in real termsSource: Macrobond

Secondly, the sizeable improvement in government finances allows room in the budget for higher government spending and investments. This will provide an additional boost to German economic growth. Influenced by negative yields on German government bonds and higher tax revenues as a result of the stronger economy, the government actually booked a budget balance surplus of 0.7% of GDP in 2014. We expect the German government to post positive budget balances in 2015 and 2016 as well, which will significantly lower the government debt ratio.

Lastly, international trade is developing positively in Germany, with 2.2% growth in export volume in the second quarter compared to the first quarter of 2015. We expect the favourable development of exports to offset the strong growth in imports (driven by the high level of private consumption) over the next two years, with the net trade contribution to growth amounting to ½% points in 2015 and a ¼% points in 2016. Although among the large eurozone countries Germany has the strongest trade relations with China, the decline in Chinese imports earlier this year has had only a limited effect on overall trade. This is partly because lower German exports to Asia have been amply offset by strong growth in exports to the US, which is a more important trade partner.[1] German exports are benefiting from the low euro, which makes German products cheaper for importers outside the eurozone.

Investment still somewhat disappointing

Investment in Germany is still disappointing and actually contracted by 0.4% in the second quarter of this year compared to the first quarter (quarter-on-quarter, or q-o-q). The contraction was mostly due to a 1.2% q-o-q decline in investment in the construction sector, which we see as a correction to the strong increase in investment during the preceding two quarters because of the mild winter.

Figure 3: Investment growth in Germany is sluggish
Figure 3: Investment growth in Germany is sluggishSource: Macrobond

The decline in German investment suits the broader picture of sluggish investment growth in the Euro Area. At the same time, this is notable in Germany’s case, given the positive development of its economy, the growth in number of orders and the return of capacity utilisation to a normal level after a brief dip in 2013 (see Figure 3).

In view of the sound base of the German economy, we expect investment to pick up again and achieve average growth of 2¼% in 2015 and 3% in 2016.

Risks are increasing

An escalation of the refugee problem, spread of the emissions fallout at Volkswagen to other German car manufacturers and more negative news on the performance of the Chinese economy are all factors that could affect the solid base of the German economy. We also expect the problems in relation to Greece to resurface sooner or later. In view of their topicality, we will look at the first two of these issues in more detail.

The refugee problem

More than any other European country, Germany is facing a huge inflow of refugees from Syria and North Africa. At the time of writing, half a million refugees have already arrived in Germany and the German government is expecting another half a million to arrive by the end of this year. It is difficult to assess the economic impact of these vast inflows of refugees based on of the scant information currently available. We accordingly can only make a rough estimate of the implications along three lines, in which we will ignore the political implications for European integration and political sentiment in Europe.

  1. First of all, in the short term there will be budgetary expenses associated with the care of refugees that will have to be paid for by public means through higher taxes at the federal or state level. Based on budget transfers by the states to the municipalities in relation to accommodating refugees, Deutsche Bank is reporting a sum of € 9,000 per refugee per year. This includes the costs of housing and health care, but not the costs of language courses and further integration.[2] The states have already taken account of a total sum of € 2.7 billion for the care of 300,000 refugees at the beginning of the year. If, as expected, the total number of refugees arriving reaches one million by the end of this year, another € 6.3 billion will be needed.
  2. Secondly, there may be negative implications for international trade if the recent European plan for the reallocation of refugees does not work out as foreseen and countries return to intensifying their border controls. This could affect the free movement of people, goods and services within the European Union, as established in the Schengen treaty. While these implications also have a short-term effect, they could ultimately have a more long-term effect if border controls become permanent. This could significantly increase transaction costs for intra-European trade, which amounts to around half of the total added value generated by trade. A recent study by Davis and Gift (2014) shows that the Schengen treaty has a significant positive effect in various model estimates of between 0.09% and 0.15% per year on trade between two countries that are signatories to the treaty.[3] The effect is limited, but based on the total volume of trade within the EU it amounts to a trade loss of roughly € 3½ to 5¾ billion on an annual basis.
  3. In the medium to longer term, the inflow of refugees provides economic opportunities. Germany has a rapidly ageing population. Although labour participation is expected to rise, the sharp reduction in the working-age population will lead to a decline in the labour force (see Figure 4). Labour supply is already expected to decline slightly in 2017. Ortega and Peri (2014) suggest there is evidence that migration leads to positive effects on the employment rate, but at the same time it slows productivity growth, resulting in neutral effects on income per worker. Lower productivity growth occurs because migrants often find work in non-tradable sectors (such as hospitality and domestic service), that are characterised as being very labour-intensive and very labour intensive, such as hotels and restaurants, household services, etc.[4] The negative effect on productivity growth in the current situation may, however, be much lower than the effects found by Ortega and Peri, since the refugees from Syria are supposedly relatively highly educated.[5] The inflow of refugees into Germany could therefore have a positive effect on prosperity over time.
Figure 4: Labour supply is declining due to the ageing population
Figure 4: Labour supply is declining due to the ageing populationSource: UN, Eurostat, Rabobank

The VW emissions scandal

It has recently become known that Volkswagen has installed software in many of its diesel vehicles in order to manipulate the results of emission tests. The consequences for the car manufacturer are significant: the company has to recall half a million cars in the US, it can no longer sell some of its diesel models in some European countries and its stock price has been plummeting. VW is also facing a fine by the US environmental protection agency EPA (a sum of € 16 billion has been mentioned) and further claims have not been ruled out. 600,000 people are involved with the Volkswagen Group worldwide, and in Germany 260,000 employees face an uncertain future.

The bigger question is whether the scandal has also damaged the image of the whole German car industry and even tarnished the brand ‘Made in Germany’ in general. Currently it is still unclear whether other German and European car makers have been guilty of manipulating fuel emission tests. A recent study suggests that the discrepancy between reported and actual fuel emissions of cars produced in Europe has risen from 8% in 2001 to 40% in 2014, with scores of more than 50% for some models.[6] In addition, German motoring organisation Adac has shown that some of the diesel cars it examined released over 10 times more nitrogen oxide (NOx) than revealed by existing EU tests. If further investigation reveals that the VW scandal is just the tip of the iceberg, this could have negative consequences for the entire European car industry.[7]

Figure 5: Share of German car industry in added value and total exports is high
Figure 5: Share of German car industry in added value and total exports is highSource: OECD STAN database, UNCTAD

Figure 5: Share of German car industry in added value and total exports is high

The share of manufacturing value added and total German exports generated by the German car industry is 14% and 17% respectively (see Figure 5). At the same time, many service providers and suppliers are closely related to the automotive industry. This means that the negative spill-over effects of the scandal could affect a significantly larger part of the German economy. One in every seven jobs in Germany is directly or indirectly related to the German car industry.[8]

If the fraud remains limited to VW and the company is able to settle the claims against it quickly and clear its brand’s name, the effects will probably remain limited. Toyota and General Motors have had to recall models in the past due to safety problems that even involved fatalities, but this had little effect on the market share of these brands. Over time, the scandal may even have positive effects if European car manufacturers, which previously have focused heavily on the development of diesel technology, decide to intensify their transition to more sustainable technologies. This would involve substantial investments.


[1] Of the total value added embodied by foreign final demand in Germany (30%), China accounts for 2% and the US 3.3%.

[2] Deutsche Bank, Focus Germany, 1 September 2015.

[3] Davis, D. and T. Gift (2014), The positive effects of the Schengen agreement on European trade, The World Economy37 (11), pages 1541-1557.

[4] Ortega, F. and G. Peri (2014), The aggregate effects of trade and migration:Evidence from OECD countries, Springer International Publishing.

[5] Figures on the background of refugees in Sweden show that 40% of those coming from Syria have upper secondary education or higher. See The Economist, Time to Go, 26 September 2015. NOS, Werkgevers willen vluchtelingen aan werk helpen, 10 September 2015.

[6] European Federation for Transport and Environment AISBL, Mind the Gap:Closing the chasm between test and real-world car CO2 emissions, September 2015. International Council on Clean Transportation, From Laboratory to Road.A 2015 update of official and “real-world” fuel consumption and CO2 values for passenger cars in Europe, September 2015.

[7] European car manufacturers have been investing heavily in diesel technology and diesel cars represents a disproportionately large amount of European carmakers’ domestic sales, compared to global sales and sales in the US. See Financial Times, VW scandal set to choke diesel car industry, 22 September 2015.

[8] Chancellor Merkel made this statement, however we also found calculations in for instance Guay, T.R. (2014), The Business Environment of Europe:Firms, Governments, and Institutions, Cambridge University Press.

Hugo Erken
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2223 1650

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