Tuesday, January 15, 2013

German economy confirmed as stability island

It is a strange habit of the German statistical office to release GDP data for the entire past year before actually publishing fourth quarter data. According to the just released numbers, German GDP increased by 0.9% in 2012 (a non-calendar adjusted 0.7%). This outcome suggests that the German economy has entered contractionary territory in the fourth quarter, probably contracting by some 0.3/0.4% QoQ.

The economic recovery, the stable labour market and euro-crisis-driven record low interest rates have led to a further improvement of public finances in Germany. According to the statistical office, the government’s fiscal balance recorded a surplus of 0.1% of GDP, the best fiscal performance since 2007. In cyclically-adjusted terms, the fiscal balance should even be better. As a consequence, Germany has overachieved its own fiscal targets. The government has reached a balanced budget already four years before the official start of the legally-binding debt brake.

If the German economy were text-book example of a closed economy, it would still be an island of happiness. Record high employment, solid consumption, wage increases and a housing boom could have made 2012 another boom year. Unfortunately, the slowdown of exports in the second half of the year and delayed investments (despite record low interest rates) due to uncertainties surrounding the euro crisis weighed on growth.

Looking ahead, she sound economic fundamentals should ensure another solid growth performance in 2013: i) Private consumption should remain stable and could even benefit from further employment growth if the latest immigration trends continue. ii) The German economy should be one of the first beneficiaries of any pick up of the global economy. iii) Domestic investment could become the growth wildcard for in 2013. Financing conditions have never been more accommodative in Germany than at present and in addition many companies have increased their cash positions last year. If uncertainties surrounding the euro crisis and the global economy ebb away further, pent-up investment could become an important growth driver.

The German economy might not be an island of happiness any longer but it remains at least an island of growth in a still recessionary Eurozone sea.

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