Tuesday, May 12, 2015

Good but not good enough?

The German statistical agency just released the first estimate of first quarter growth. The Eurozone’s largest economy grew by 0.3% QoQ in the first quarter, from 0.7% QoQ in the final quarter of 2014. On the year, GDP growth is 1.1%, from 1.6% in Q4 2014. GDP components will only be released at the end of the month, but according to available monthly data and the statistical agency’s press release, growth was mainly driven by domestic factors. While private consumption, government spending, investment and above all the construction sector contributed positively to growth, new exports should have been a drag. The story has been written now so many times. The German economy is still benefitting from earlier reforms, which are now artificially extended by external tailwinds, mainly caused by the ECB’s QE. The more provocative question German policymakers should start to ask is why is the economy growing faster? Pushed by job security, higher wages and low interest rates, Germans have finally started to consume; exports, supported by the weak euro, are again fast-selling items with the current account surplus reaching new record highs almost every month; and public revenues exceed expectations year by year. Against this background, today’s 0.3% QoQ could even be called weak. In our view, there are at least three missing links to an even stronger recovery: the labour market, investment and public finances. In fact, the labour market seems to have reached a level of full employment. New structural reforms would be needed to push unemployment below the level it has now been fluctuating around for two years. As regards investment, except for the construction sector, industrial production has moved rather horizontally for almost four years. This is either reflecting a structural change in the economy, where industrial production has become less important, or it is showing the need for more domestic investment. Finally, the strong performance of public finances is positive for the future of an ageing economy and society but at the current level of interest rates might not be the choice to tackle weak investment. All in all, today’s GDP data confirms the ongoing solid performance of the Eurozone’s largest economy. It also confirms our call of 0.4% GDP growth QoQ for the Eurozone (to be released at 11am CET). However, as witnessed in yesterday’s soccer Champions League semi-final: a solid performance is not (always) sufficient to stay at the top. As Bayern Munich will probably now discuss new investments in its current squad, the German government should do the same for its economy.

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