Thursday, January 15, 2015

German economy grew by 1.5% in 2014

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 1.5% in 2014 (both calendar and non-calendar adjusted), from 0.2% in 2013. In our view, this outcome suggests that the German economy has probably grown by some 0.3% QoQ in the fourth quarter. Moreover, the statistical office also released a first estimate of Germany’s 2014 fiscal balance. While almost the entire rest of the Eurozone is still engaged in austerity policies, German public finances remain strong. According to the statistical office, Germany recorded a fiscal surplus of 0.4% GDP in 2014, leading to a new historic record of posting three consecutive years with a fiscal surplus. German austerity fetishists will love it. With today’s numbers, the economic year 2014 can almost be filed away. It was a very special year in which the German economy sometimes showed characteristics of a small banana republic as it proved unusually sensitive to the weather, the timing of vacation and public holidays. Particularly the curse of vacation could still have some echoing effects on Q4 growth. The Christmas vacation period should have slowed down industrial production significantly in December, making a downward revision of Q4 numbers likely. Of course, on a more serious note, the economy was also affected by geopolitical conflicts in its backyard and ongoing weakness in other Eurozone countries. However, under the surface of vacation-driven volatility, the economic success story continued as unemployment remained low, employment reached a new record high and private consumption turned out to be an important growth driver. Looking ahead, despite all public criticism, the German economy should be one of the main beneficiaries of any forthcoming QE by the ECB. Even lower interest rates should further support the housing market (the construction sector currently expects 2015 to be the best year in 15 years) and some domestic investment and further weakening of the euro is excellent news for the German export sector. Add to this extremely low energy prices, which particularly should be balm for the souls of SMEs and consumers, and it makes the ultimate stimulus package for the economy. The only downside of QE and consequently this free stimulus package is that it will probably further delay new structural reforms. But this is probably not what critics of the ECB have in mind.

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