German economy booms on back of mild winter weather

As good as it can get? The German economy staged the expected impressive performance in the first quarter of 2014. According to the first estimate of the German statistical office, the economy grew by 0.8% QoQ, from 0.4% QoQ in 4Q13. On the year, German GDP is up by 2.3%, from 1.4% in 4Q13. The individual growth components will only be released at the end of the month but available monthly data and the statistical office’s press release suggest that growth was exclusively driven by domestic demand. Particularly the construction sector, driven by the mild winter weather, should have been an important growth engine. Looking ahead, two opposing trends will affect the future growth path of the economy. On the positive side, the elements of Germany’s economic success formula are almost unchanged: the strong labour market, wage increases and the construction sector should support growth in the coming quarter. Moreover, low inventories and richly filled order books should support industrial production, at least in the short run. On a more negative side, the weakening of Germany’s biggest trade partner, France, combined with the ongoing geopolitical crisis close to Germany’s backyard and the Chinese slowdown, the former growth engine exports is currently only running at half speed. The factor which could tilt the balance between positive and negative elements is investment. It’s the German growth wild card. Having been a drag rather than a push-factor for growth over the last years, domestic investment has started to gradually pick up last year. Gross operating surpluses at all-time highs, strong liquidity positions and some capital repatriation argue in favour of strong investment growth. On the other hand, however, capacity utilisation rates are only at, but not above, historical averages and recent surveys show that German companies hardly see equipment as a constraint for production. At the same time, credit growth is also shrinking, not growing. In our view, domestic investment should continue to pick up, but only at a subdued level. Investment growth this year should rather be a cyclical rebound than a structural shift, showing that creditless recoveries do exist. All in all, Germany has again cemented its role as the Eurozone’s economic powerhouse. The current growth pace can hardly be maintained and some slowdown to more normal growth rates is in the offing. However, any complaints about the upcoming slowdown would be complaining on a high comfort level.