Focus on the new economy and productivity

The recent positive surprises provided by real economic indicators have for now banished concerns that Germany might slide into recession in Q3. However, the ongoing geopolitical risks and the question marks hanging over the expected cyclical upturn will probably lead to weaker growth in exports and company investment. That is why we have scaled back our growth forecast for the winter half-year 2014/2015. Thus, we have lowered our forecast from 1.8% to 1.5%. In our current issue we also address Germany’s fiscal position, we analyse the consequences of potential Russian gas supply disruptions and we take a look at the investment behaviour of German households. [more]

German GDP only 1 ½% in 2014, considerable risks for 2015. We have scaled back our GDP forecast for 2014 from 1.8% to 1 ½%, as we now expect weaker growth in H2. This also reduces our forecast for 2015 from 2.0% to 1.8%. The risks that this still constitutes an overly optimistic forecast have increased significantly. The German investment cycle will likely be more subdued than expected due to the ongoing weakness of world trade and increasing geopolitical strains. Even the hitherto still robust private consumption is emitting its first warning signs. [more]

Economic growth probably suffered a worse setback in Q2 than initially presumed. We only expect stagnation now, but would no longer rule out a minimal decline. All in all, global economic conditions do not point to dynamic growth in H2. In particular, the tougher sanctions on Russia and the risk of further escalation of the conflict are set to weigh on business sentiment and investment activity in spite of Russia's low share in German exports. The debate triggered by ECB and Bundesbank comments about higher wage increases in Germany is likely to have a similar impact, even though the substance of the statements is less spectacular, on closer inspection, than the media hype. As uncertainties abound we have decided to refrain for now from making a downward revision to our full-year forecast of 1.8% GDP growth. [more]

With the dream start into 2014 we have lifted our GDP forecast to 1.8% (from 1.5%). For 2015 we maintain our 2% call, as we expect that the only temporary increase in the sum of gross wages resulting from the introduction of the minimum wage will be offset by more cautious investment spending. [more]

Given the continued strong employment build-up and wage increases as well as slight increase in hours worked disposable income should grow by 2.5% even though monetary social benefits and income from self-employment and from investment are expected to rise only at a sub-par rate. Due to the falling inflation rate this allows real private consumption to rise by 1.2% in 2014, and might even have some upside potential. From 2015 the federal government plans to deliver a balanced budget. This year the federal budget will already run a structural surplus. Budgetary risks arise from higher interest rates and a weakening economy, as the budget includes barely any reserves for them while being exposed to potential additional spending on adjustments that need to be made to the minimum subsistence level (basic personal allowance) and children's allowance or for increases that need to be made to infrastructure spending. [more]

The details of the 0.4% qoq GDP increase released this week have not altered our GDP forecast of 1.5% for 2014. If anything, they have added to our suspicion that current surveys (corporate and consumer) might paint a too rosy picture. However, we have turned somewhat more optimistic with regard to 2015, increasing our GDP forecast from 1.4% to 2.0%. [more]

We see economic growth in the order of 1.5% this year. Continuously strong private consumption and a rise in investment in machinery and equipment for the first time in two years are expected to lay the foundation for this solid performance. Moreover, we expect net exports to rise slightly as well in light of a global economic recovery. The labour market will remain a fundamental pillar of domestic demand also in 2014. With oil prices still relatively stable and tame domestic price developments, we expect the rate of inflation to come in at roughly the pre-year level of 1.5% on average in 2014. After a nearly balanced public-sector budget in 2013 a slight surplus seems to be in store for 2014, and public debt will likely fall in the direction of 76% of GDP, down from 81% at the end of 2012. [more]

The coalition intends to hugely increase pension benefits, introduce a minimum wage and increase public spending. There is as little provision for tax hikes (SPD campaign issues) as for tax relief (CDU and CSU pledges). Trend growth, in particular labour supply, will be weakened. Inefficiencies in energy policy will be inadequately addressed. The sustainability of public finances will be substantially reduced. [more]

Recently, the labour market has been marked by rising unemployment alongside a sustained increase in overall employment. The surprisingly strong increase in unemployment in September was reported by some newspapers as a "stalling German jobs miracle". The labour market upswing is still intact. Leading indicators suggest that the increase in employment is likely to accelerate again towards year-end. We expect the number of persons in employment to rise by 230,000 to a record high of 42.3 million in 2014.
In October the IAB released a new leading indicator for the short-term development of the labour market. In contrast to other leading indicators of the labour market the IAB index aims to forecast the change in the number of unemployed instead of the number of employed. The new index is a good predictor of the monthly changes in the number of unemployed, however, from a growth perspective employment is the more important indicator.
The increase in German house prices since 2008 has triggered concerns about the beginning of a housing boom. Our analysis of OECD house price cycles reveals that the current German upswing has been moderate so far compared to past German upswings and is one of the least pronounced among the cycles in OECD countries. We expect that real house prices continue to increase in Germany in the coming years, but that the formation of a bubble is rather unlikely thanks to no sign of excess in other relevant factors (e.g. labour market and credit growth). [more]

After the strong showing of the conservatives in the federal elections, Germany is moving in big steps towards a centrist coalition government consisting of CDU/CSU and SPD. There are at least three reasons for this course of action: the "energy turnaround", the renegotiation of fiscal federalism and banking policy, all call for a tight coordination between the federal level and the 16 states, nine of which are governed by SPD-led coalitions. Up-coming decisions in euro area management would benefit from a solid majority in the parliament, too. The CDU/CSU will have to provide substantial concessions to the SPD to make it happen. We expect this to happen. [more]

We have lifted our forecast for 2013 GDP growth in Germany from 0.1% to 0.5%. This is not based on a more bullish assessment of H2's growth dynamics, though. Our call results instead from the growth surge due to one-off effects in Q2 (0.7% yoy) and from revisions to the 2012 performance as these produced a smaller statistical underhang and thus lead to a higher annual average for 2013. [more]

In this issue we look at two structural aspects of the German economy which provide speed limiters for GDP growth. The first is the interplay of foreign and domestic demand with implications for the current cyclical forecast. The second is the demographic implications for German labour supply which will be the biggest bottleneck for the economy’s long term growth potential. [more]