Germany

Economy humming

Country Rating AA1

Strengths

  • Low systemic political risk
  • Good regional and international relations; EU and EMU membership
  • Healthy public finances
  • Strong manufacturing base (one quarter of GDP)
  • Production and export of high-end products
  • Adequate export diversification (products and trade partners)
  • Current account surpluses since 2002

Weaknesses

  • Aging population
  • Dependence on exports
  • Low investment-to-GDP ratio (20% in 2016)
  • Vulnerability to slowdown in Chinese demand, especially investment spending



Economic Overview

 

Bright growth outlook

The German economy clearly moved up a gear in the first nine months of 2017. In the third quarter real gross domestic product notched up a seasonally and calendar-adjusted increase of 0.8%. As the Federal Statistical Office has also revised up the sequential rate for the first quarter 2017 to 0.9% (previously 0.7%), annual average growth in 2017 looks set to come in at 2.6% (in calendar-adjusted terms). This is the strongest growth rate since 2010, when the economy recovered in the aftermath of the Global Financial Crisis of 2008.

 

Since then, German economic growth has been driven largely by private and public consumption. Over the same period, cumulative gross investment has made virtually no contribution to growth. This year, however, the prospects are good that both construction and machinery investment will provide a substantial boost to growth. Rising capacity utilization, the improved equity bases and healthy liquidity positions of companies, and favorable financing conditions should at last give a lift to machinery and equipment investment. Given sizeable pent-up demand, the investment cycle could last for a while, meaning, so to speak, that the next and probably last stage of the German growth rocket will ignite.Overall the growth outlook for the Eurozone’s biggest economy remains very favorable. Sentiment among German businesses is still very upbeat. The Ifo business climate index rose to a new record high of 117.5 points in November from 116.8 points in October.

 

The recent rise was due to far more optimistic business expectations, while companies assessed their current situation slightly less positively than in the prior month. Other indicators such as above-average capacity utilization and full order books in the industrial sector clearly point to an ongoing economic boom. Real GDP run rates are unlikely to come down considerably in the coming quarters. For 2018 we have penciled in growth in the German economy of 2.5% in calendar-adjusted terms.

 


Positive trend on the labor market to continue

 In the absence of dark clouds on the economic horizon, we expect the positive trend on the labor market to persist next year. However, the momentum is likely to be weaker than this year. On average in 2018 we expect the jobless total to decline by 94,000 to 2,442,000, following a drop of around 153,000 this year. The smaller decline next year is linked not least to the expected rise in jobless registrations by refugees as, among other things, numerous integration courses will come to an end in the coming months.

 

The increase in the number of people in work in 2018 is also likely to be somewhat more moderate than this year. We are penciling in 530,000, corresponding to a rise of 1.2%.  For comparison: This year the annual average increase will be around 650,000, up 1.5%. According to the Federal Employment Agency, the ongoing jobs growth stems exclusively from the increase in jobs liable to social insurance. Other forms of employment such as self-employed and those exclusively in mini-jobs are on a downward trend.

Last review: 2017-12-01