The prevailing conditions for the German economy at the turn of the year read like a dream come true: a competitive export industry, sound public finances, a high level of employment, rising actual income, a supportive fiscal and monetary policy, good financing conditions, a banking system that has been largely cleaned up, sinking commodity prices, overall stable prices, a moderately depreciating currency, and a respectively expanding economy.
But despite all that, the forecasts by the research institutes and bank economists for economic growth in 2015 is only about 1.5 percent. This roughly corresponds to growth in the closing year.
One thing is already clear: The number one growth-driver in 2015 will be consumer spending. Employment rates will probably once again reach record levels and at the same time a strong rise in actual earnings is to be expected.
The introduction of the minimum wage will also have an effect. It could be accompanied by a slight rise in the number of unemployed. In addition, with oil prices being almost cut in half, households’ disposable income will increase.
All of this would indicate that the spending mood of the Germans will once again become stronger.
However, increased consumer spending could also result in foreign trade having a negative contribution to economic growth in 2015. Even if exports once again are approaching record levels, there will be an even greater increase in imports.
Also, because of the German government’s political goal of achieving a balanced budget, stimulation through government spending will more likely be reduced than increased.
The major cause of uncertainty is the Ukraine crisis.
The great unknowns are the business investments – many observers see in them the Achilles’ heel of the German economy.
How strongly they will increase is largely dependent on the confidence of companies in a positive development of the domestic market, the euro zone and the important global sales markets.
Financing conditions do not present a problem. German companies are swimming in capital resources, and interest rates could hardly fall any lower.
Nevertheless, German business is concerned about political and economic risks. The major cause of uncertainty is the Ukraine crisis.
Although the fighting has calmed, Russia is in danger of economic collapse because of the deterioration of oil prices and economic sanctions. Much could happen as a result of the enormous strain from the financial markets – a new escalation in Ukraine to draw attention away from economic problems or even a destabilization of the Putin government.
One way or the other, German companies involved in Russia are in danger, which is sorely affecting some industries. Other countries are also being hit by the fall in oil prices, which will hurt export business.
But on a global scale, the positive effects of cheap oil outweigh the negative.
However, despite the good conditions, things could take a completely different turn.
This is especially true of the euro zone, which still remains by far the most important market for German exporters. The boost provided by the slide in oil prices and the simultaneous weakening of the euro come at just the right time to bolster the former ailing countries of Spain, Portugal, Ireland and Greece, and provide the governments in Italy and France the breathing space needed for reform.
At best, this boost will give the people assurance and companies the confidence to invest again. Then the upswing could gather steam in the course of 2015. Worst case scenario is that there will only be a one-time stimulus and its effect will subside in the second half of the year.
However, despite the good conditions, things could take a completely different turn. New elections in Greece could set a course toward withdrawing from the euro. Elections in Spain and Great Britain could intensify the political tension in the European Union. And should the European Central Bank actually start purchasing government bonds on a major scale, disputes could again erupt with Germany’s central bank, the Bundesbank, and the German government.
All of that together has the potential of causing turmoil in the financial markets and triggering a comeback of the euro debt crisis.
But the bottom line is that the opportunities outweigh the risks. If there is no escalation of political risks, the German economy could most certainly prove to be a positive surprise in the new year. But in order to reach two percent growth, we would need another unusually mild winter.
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