Happy Germans

The Growth Machine is Back

happy germans_3-AnzenbergerAgency
Germans are spending money and living life.
  • Why it matters

    Why it matters

    The German institutes are the latest group to suggest that Germany’s economy can expect a good few years on the back of the European Central Bank’s easy money policies.

  • Facts

    Facts

    • Germany’s leading private institutes now expect the German economy to grow 2.1 percent this year, compared to a forecast of just 1.3 percent in October.
    • The institutes see domestic consumption rising 3 percent this year.
    • Exports should increase 5.9 percent and the country’s trade surplus rise to 8.5 percent of economic output.
  • Audio

    Audio

  • Pdf

It’s a been remarkable turnaround in the shortest of periods. Back in October, there was talk that Germany might face a recession. The summer had been unkind, and economists in Germany spoke of a “stagnating” economy.

Instead, it now looks like Europe’s largest economy can expect nothing but good news in the coming years. Consumers can expect more money in their pockets, the result of rising wages and low inflation, while the government can expect its coffers to overflow with fresh tax proceeds.

This suddenly rosy outlook seems to be the message from the latest forecasts by a group of Germany’s top private economic institutes, which twice a year issue a joint report on the economy at the request of the government in Berlin.

While much of Europe still remains in crisis, with Greece flirting with an exit from the 19-nation euro zone and major economies like France and Italy struggling to improve the competitiveness of their businesses, Germany’s powerhouse economy seems to be rolling on as if immune to the problems of its neighbors.

For 2015, the institutes on Thursday said they expect Germany’s economy to grow at 2.1 percent. That would mark the fastest growth rate in four years and would outpace any other major economy in the euro zone. Of the major European economies, only Britain can expect to see stronger growth this year.

“The economy is being stimulated by unexpected expansive impulses, in particular the fall in the oil price and the strong devaluation of the euro.”

German Economic Institutes

German households, long notorious for saving their cash, are clearly driving the new optimism. The institutes see consumption expanding 3 percent this year. Consumers are being encouraged to spend money rather than save it by the European Central Bank, which has pushed interest rates to record lows and in March launched a €1.14 trillion bond-buying program to push interest rates down even further.

Consumers are just part of the story. Germany, the world’s second-largest exporter behind China, can also expect to remain an export giant in the coming years. Businesses are being aided by a plunging euro, which has lost about 20 percent of its value in the past year.

The good times should continue in 2016, when output is seen expanding at a solid rate of 1.8 percent. The group of forecasters is led by Munich-based Ifo institute, the Berlin-based DIW, the RWI in Essen and IWH in Halle. Altogether, eight think-tanks took part in the exercise.

It marks a nearly 180-degree turn from the group’s forecasts of just six months ago. Back then the prestigious group warned of a collapse in the economy over the winter months and predicted economic growth of just 1.2 percent in 2016. The summer had been unkind to Germany, with the economy shrinking 0.1 percent in the April-June period.

Instead, it turned out Germany’s economy was already on the rise: Output grew by 0.7 percent in the final three months of last year. In the end, Germany’s economy grew 1.6 percent over the course of last year – more than any other major economy in the 19-nation euro currency zone.

So what happened? Like most economists, the institutes blame their faulty forecasting on factors that were outside of their control. Global oil prices took a sudden drop starting in April last year, while the ECB’s decision to launch a massive bond-buying program has also been a foregone conclusion.

The Germany economy “is being stimulated by unexpected expansive impulses, in particular the fall in the oil price and the strong devaluation of the euro,” the institutes said in a statement.

 

Economic Upswing-01

 

Carsten Brzeski, chief European economist with the German-Dutch bank ING-Diba, suggests the institutes may have been a little too spooked by a period of weakness last summer. On the flipside, he warns that they may be too optimistic now.

“There is again the risk that while trying to get ahead of the curve, they’re actually behind,” Mr. Brzeski told Handelsblatt Global Edition. He warned there has been “hardly any hard data” yet for this year. While a strong growth number of more than 1 percent is virtually assured for this year, there are still risks that issues like the Greece crisis, and weaker-than-expected investment could temper the optimism somewhat.

The private German forecasters are not the only group that has become more optimistic of late. The International Monetary Fund, in its quarterly global forecasts released earlier this week, raised its expectations for the German economy to 1.6 percent this year and 1.7 percent in 2016, up 0.3 percentage points and 0.2 percentage points respectively from its last update in January.

So what should the government do with all the extra cash? Only the DIW, in a minority vote on the economic panel, has called for the money to be spent on new infrastructure projects. The remaining institutes called for tax cuts, arguing the solid economy means the time has never been better for a comprehensive reform of the tax code.

 

Axel Schrinner is an editor covering the economy with Handelsblatt in Düsseldorf. Christopher Cermak covers finance and economics for the Handelsblatt Global Edition in Berlin. To contact the authors: cermak@handelsblatt.com and schrinner@handelsblatt.com

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!