Tuesday, May 15, 2012

Return of the German economy

The German economy has staged an impressive comeback in the first quarter. According to a first estimate of the statistical office, the Eurozone’s biggest economy grew by 0.5% QoQ, from -0.2% in 4Q 2011. Compared with 1Q 2011, this is an increase of 1.7%.

The decomposition of growth will only be released at the end of the month but according to the press statement of the German statistical office and available monthly data, exports should have been the main growth driver. Consumption could have also added to growth, while investment should have been down.

The German economy has escaped the technical recession many other Eurozone countries are currently experiencing with no more than a fright. Looking ahead, with the strong fundamentals, the German economy should remain the stronghold of the Eurozone. However, the stronghold’s immunity against downward trends in most other Eurozone countries is vanishing. The continuous drop in new orders from other Eurozone countries shows that the euro crisis is getting closer. The export engine could spatter sooner than later. Consequently, the future path of the German economy will be increasingly dependent on whether wage increases and the strong labour market can really lead to stronger domestic demand. Not so much for the sake of Eurozone rebalancing but for the sake of German growth. In our view, domestic demand should be strong enough to support growth this year and next year but not beyond. As German exporters are facing global and not only Eurozone competition, a longer period of German wage catching up seems rather unlikely.

With this morning’s numbers, the German economy has not only avoided recession but could have even helped the entire Eurozone economy falling into technical recession. We will know more later this morning. One thing is at least for sure: the German economy remains the powerhouse of the Eurozone economy. Any Eurozone rebalancing still looks like a scenario of a remote future.

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