Germany

5. GERMANY
Growth momentum temporarily halted by uncertainty
Heightened uncertainty clouds the short-term
growth outlook
Following the remarkable rebound in 2010,
Germany experienced a very dynamic start in
2011, with real GDP expanding by 1.3% in the
first quarter from the previous period. This was
followed by an expansion of only 0.1% in the
second quarter. The underlying growth momentum
is likely to have been steadier than suggested by
this uneven pattern, with some special factors –
including the impact of weather on construction
activity and the accelerated phasing-out of some
nuclear power plants – influencing the quarterly
profile. Despite healthy export growth, the
expansion in the first half of the year was driven
predominantly by domestic demand.
need to repair private and public balance sheets.
Therefore, only a temporary interruption of growth
is expected before robust momentum is recaptured
as uncertainty dissipates. The projected pace of
expansion in 2013 is in line with the economy's
medium-term growth trend. Domestic demand
should remain the prime driver of growth over the
forecast horizon, again reflecting sound domestic
fundamentals in conjunction with slower export
growth.
Graph II.5.1: Germany - GDP growth and
contributions
6
pps.
forecast
3
0
In the meantime, however, downside risks have
increased markedly and indicators are pointing to
further moderation of growth in the second half of
the year relative to the beginning of the year.
While available data on industrial production bode
well for the third quarter, the growth momentum
could stall temporarily thereafter. The external
environment deteriorated over the course of the
autumn. Consumer confidence has been dampened
by mounting uncertainty amid the ongoing debt
crisis; firms' assessment of the business outlook
has been on a downward trend for some months,
albeit starting from a high level; and orders
received have been on the decline. So far, neither
the availability of credit nor financing conditions
appear to be much affected by the uncertainty and
reappraisal of risks in financial markets.
Nevertheless, increased uncertainty is likely to
weigh on the German growth outlook during the
coming quarters. Export prospects are more
subdued than expected earlier and uncertainty
could have an impact on domestic confidence and
demand.
However, the impact of uncertainty should be
limited by the fact that the economy's
fundamentals are essentially sound. An extended
period of structural adjustment prior to the crisis
led to increased flexibility in the labour market,
restored competitiveness and strengthened
corporate sector balance sheets. At the same time,
given Germany's lack of major accumulated
domestic imbalances such as overheating housing
markets, the economy is not being held back by the
94
-3
-6
05
06
07
08
Investment
Consumption
GDP growth (y-o-y%)
09
10
11
12
13
Net exports
Inventories
Export prospects more subdued, rebalancing
to continue
Exports were vigorous in the first half of 2011,
with deliveries to the euro area expanding
particularly strongly. For the year as a whole, net
exports are expected to contribute 0.4 pp. to GDP
growth, despite strong imports on the back of
buoyant domestic demand. However, with more
than 40% of German goods exports going to the
euro area, export growth is set to moderate,
especially in the next few quarters. Given the
projected increase in unit labour cost, this
moderation is not expected to be offset by market
share gains. Import growth should remain
relatively resilient, given that the slowdown in
domestic demand is expected to be temporary and
modest. Overall, this should lead to a markedly
negative growth contribution from external trade in
2012, contributing further to the rebalancing
among demand components and the ongoing
reduction of the German current-account surplus.
In 2013, a pick-up in both export and import
growth is projected, with net trade exerting only a
slight drag on GDP growth.
Member States, Germany
Moderating exports temporarily weighing on
investment
Gross fixed capital formation was a key driver of
the upturn, expanding by 5½% in 2010 and by
9½% y-o-y in the first half of 2011. However, the
current uncertainty is likely to affect investment
over the coming quarters. Specifically, while
financing conditions are still favourable and
capacity utilisation remains above the long-term
average, the uncertain outlook is likely to lead
firms to postpone their investment projects, with
spending on machinery and equipment being
particularly sensitive to the moderation of export
prospects. However, such postponed plans are
likely to be implemented once the economy returns
to its previous stable growth path in the course of
2012. The momentum of construction investment
was particularly buoyant in the first half of 2011.
Looking forward, while the phasing out of public
sector stimulus measures weighs on the
construction outlook, private housing investment is
likely to remain lively, supported by still
favourable financing conditions and robust
disposable income growth. Investors' likely
preference for investment opportunities carrying
relatively limited risk may also prop up residential
construction activity.
Consumption growth dented by uncertainty in
the near term
Private consumption held up well during the
2008-09 recession and expanded steadily in 2010
and early 2011, underpinned by buoyant labour
market developments. The drop in household
consumption recorded in the second quarter of
2011 was somewhat puzzling, as it exceeded by far
the impact of the temporary increase in inflation on
real disposable income, but the spending dip is
expected to be offset in the short term. Over the
coming quarters, the current uncertainty could
impinge on household consumption behaviour,
although labour market resilience should continue
to support disposable income, as should continued
robust wage growth. In comparison to other
Member States the medium-term outlook for
private consumption is further supported by the
absence of large deleveraging needs in the
household sector, as well as a relatively limited
restraining effect from fiscal consolidation needs.
Labour market to remain resilient
Having proven remarkably resilient during the
recession,(60) the performance of the German
labour market has been vibrant during the upturn,
with a projected rise in employment of about 1.3%
in 2011, one of the highest rates of increase since
reunification. Having recorded only a minor
increase in the context of the recession, the
unemployment rate dropped to an average of 6.1%
in 2011, the best performance since the early
1990s, although the share of long-term
unemployment in total unemployment remains
high.
Only a moderate further improvement in the
unemployment rate is expected over the forecast
horizon. Survey data indicate that firms plan to
further increase employment in the short term.
However, with more subdued growth ahead, labour
demand should also moderate. While a significant
further increase in employment is forecast for
2012, this reflects to a large extent the statistical
carry-over resulting from the continuous
improvement in 2011. Developments should,
however, continue to benefit from the increased
flexibility in the German labour market. In 2009,
the latter facilitated a substantial reduction in hours
worked, thereby greatly limiting the impact of the
crisis on the employment headcount. It is expected
that firms will react in a similar manner to possible
future demand shocks. Employment creation is
projected to quicken slightly as the economy
resumes its stable growth path later in the forecast
period. In a medium-term perspective, shortages in
certain high-skill segments of the labour market
could turn into a major bottleneck for Germany's
growth potential against the background of the
trend decrease in the working-age population.
Wages and
moderate
consumer
price
inflation
to
Supported by buoyant labour market conditions,
wages rose substantially in the first half of 2011,
with a sizeable increase in hours worked and
voluntary one-off payments contributing to a
markedly positive wage drift. Despite healthy
productivity developments, this is projected to
result in a clear increase in unit labour costs,
contrary to the pre-crisis trend of improving cost
competitiveness. While the clouding of the
economic outlook might have a slightly damping
(60)
See box 1.2.1 in chapter 1.2. Post-recession labour market
patterns in the EU for details.
95
European Economic Forecast, Autumn 2011
impact on forthcoming wage negotiations for
2012, wage growth is nevertheless expected to
remain vigorous in view of the still tight labour
market. Together with moderating productivity
developments from firms making use of flexible
working time agreements, this is forecast to lead to
a further increase in unit labour costs.
Following the intensification of inflationary
pressures on the back of rising energy prices in late
2010 and early 2011, consumer price inflation is
projected to slow. HICP inflation should average
2.4% in 2011 and remain below 2% in 2012 and
2013, in view of the weaker economic outlook.
Given comparatively more resilient domestic
demand in Germany than in other euro-area
economies, domestic forces are expected to take
over as the main driver of price increases, reflected
in a moderate rise in core inflation to 1¾% in
2013.
measures, including in particular the asset transfer
from Hypo Real Estate Group (HRE) to the related
bad bank FMS Wertmanagement, contributed 1.3%
of GDP to the deficit. The transfer of impaired
assets from ailing banks to related bad banks was
also the main reason for the increase of the debtto-GDP ratio from 74.4% in 2009 to 83.2% in
2010.
Graph II.5.2: Germany - General government
gross debt and deficit
6
% of GDP
5
% of GDP
forecast
85
80
4
75
3
70
2
65
1
60
0
55
-1
-2
50
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Key risks related to the resolution of the crisis
Risks to the forecast are mainly related to the
successful resolution of the international
sovereign-debt and financial crisis. On the one
hand, the forecast assumes that major feedback
loops from the financial sector via credit supply to
economic activity are less likely to occur in
Germany than in other countries. The increased
profitability of firms limits their external financing
needs, while Germany's current position as a
perceived safe haven also benefits the private
sector to some extent. Adverse effects cannot be
excluded,
however,
should
the
current
uncertainties drag on for a prolonged period of
time. Moreover, should further substantial
financial sector support measures prove necessary
and put strain on the public finances, the resulting
fiscal consolidation needs would weigh on
domestic demand. At the same time, an earlierthan-expected resolution of the crisis could greatly
limit its impact, especially on domestic demand.
Financial market stabilisation drove up deficit
and debt ratios in 2010
The general government deficit rose from 3.2% of
GDP in 2009 to 4.3% of GDP in 2010. Economic
stimulus measures in line with the European
Economic Recovery Plan (EERP) and financial
market stabilisation were the main drivers behind
the increase, while the swift economic recovery
and the remarkably robust labour market had a
favourable impact. Financial sector stabilisation
96
Gross debt (rhs)
Deficit (lhs)
Deficit threshold (3%)
Debt threshold (60%)
Accelerated fiscal improvement in 2011
The general government deficit in 2011 is forecast
to drop more rapidly than expected earlier, to 1.3%
of GDP rather than the 2% predicted in the spring
forecast. Favourable cyclical conditions are
boosting tax and social contribution revenues. In
addition, the phasing out of stimulus measures
(around 0.2% of GDP) and fiscal consolidation
efforts under the "Zukunftspaket" adopted in 2010
(around 0.3% of GDP) are contributing to deficit
reduction. For example, the contribution rate for
unemployment insurance was increased to 3%
after its temporary reduction in 2009 from 3.3% to
2.8% as part of the stimulus package.
Consolidation measures under the "Zukunftspaket"
include on the revenue side new taxes on aviation
and nuclear fuel, a bank levy and reduced energy
tax exemptions and on the expenditure side
lowered allowances for parents and benefits for
long-term unemployed, as well as savings in
federal administration and the employment agency.
Moreover, the latest health care reform, which
took effect in January 2011 and includes a 0.6 pp.
increase in the contribution rate and measures to
curb expenditure growth, also contributes to
consolidation (around 0.4% of GDP).
Member States, Germany
Sustained, but slower consolidation in 2012-13
Gross debt is projected to fall by 1.5 pps. to 81.7%
of GDP in 2011, to 81.2% of GDP in 2012 and to
79.9% of GDP in 2013 due to the denominator
effect of GDP growth. Financial sector measures
are expected to have a debt-decreasing effect of
0.4% of GDP in net terms in 2011, mainly due to
the recent redemption of injected capital by
Commerzbank. Debt projections also include the
impact of guarantees to the EFSF, bilateral loans to
Greece, and the participation in capital of the ESM
as planned at the cut-off date of this forecast. The
winding-up of assets accumulated in bad banks
could potentially lead to falls in the debt stock,
while the ongoing financial market turmoil poses
downside risks for Germany's indebtedness in the
medium term and could require new state
intervention.
The deficit is predicted to decline further in 2012
and 2013, though at a slower pace due to the
moderate growth outlook. It is estimated to reach
1% of GDP in 2012 and 0.7% of GDP in 2013.
Consolidation should continue to be supported by
the phasing-out of public investments undertaken
in the context of the stimulus package and
measures adopted under the Zukunftspaket. The
structural general government deficit is estimated
to fall from 1.3% of GDP in 2011 to 0.4% of GDP
in 2013. The constitutional debt brake, which is
being phased in as from 2011, is expected to
further improve Germany's budgetary position by
setting a structural deficit ceiling for the federal
government of 0.35% of GDP as of 2016 and
stipulating structurally balanced budgets for the
federal states as of 2020. In contrast, demographic
change poses a risk to the sustainability of social
security systems and public finances in the
medium to long term.
Table II.5.1:
Main features of country forecast - GERMANY
2010
GDP
Private consumption
Public consumption
Gross fixed capital formation
of which : equipment
Exports (goods and services)
Imports (goods and services)
GNI (GDP deflator)
Contribution to GDP growth :
Annual percentage change
bn EUR Curr. prices
% GDP
2476.8
100.0
1423.0
2008
2009
2010
2011
2012
2013
1.5
1.1
-5.1
3.7
2.9
0.8
1.5
57.5
1.1
0.6
-0.1
0.6
1.2
1.1
1.1
488.8
19.7
1.4
3.1
3.3
1.7
0.9
1.0
1.1
433.6
17.5
1.1
1.7
-11.4
5.5
7.3
2.7
4.6
170.8
6.9
2.4
3.8
-22.8
10.0
10.1
3.5
7.1
1159.8
46.8
6.5
2.7
-13.6
13.7
7.8
3.9
6.2
1024.4
41.4
5.6
3.3
-9.2
11.7
7.9
5.8
7.2
2522.8
101.9
1.6
0.6
-4.3
3.4
2.9
0.8
1.5
1.1
1.2
-1.6
1.6
2.2
1.4
1.7
-0.1
0.0
-0.9
0.6
0.3
0.0
0.0
0.5
-0.1
-2.7
1.4
0.4
-0.6
-0.2
0.2
1.2
0.0
0.5
1.3
0.4
0.2
8.6
7.5
7.8
7.1
6.1
5.9
5.8
2.0
2.1
0.0
2.0
3.4
2.5
2.6
0.7
2.3
5.5
-1.1
1.8
2.1
1.3
-0.7
1.5
4.2
-1.7
1.1
0.7
-0.2
16.2
17.4
17.0
17.0
16.8
16.7
16.6
1.4
0.8
1.2
0.6
0.8
1.4
1.5
-
2.8
0.2
1.2
2.4
1.7
1.8
0.3
-1.8
6.0
-2.5
-3.0
-0.1
0.0
4.4
7.3
5.7
6.4
5.5
4.9
4.7
1.1
6.2
5.8
5.8
5.1
4.4
4.2
1.1
6.2
5.8
5.8
5.1
4.4
4.2
-2.5
-0.1
-3.2
-4.3
-1.3
-1.0
-0.7
-2.5
-1.1
-1.2
-3.5
-1.3
-0.7
-0.4
-
-0.8
-1.3
-2.4
-1.3
-0.7
-0.4
59.0
66.7
74.4
83.2
81.7
81.2
79.9
Domestic demand
Inventories
Net exports
Employment
Unemployment rate (a)
Compensation of employees/f.t.e.
Unit labour costs whole economy
Real unit labour costs
Saving rate of households (b)
GDP deflator
Harmonised index of consumer prices
Terms of trade of goods
Merchandise trade balance (c)
Current-account balance (c)
Net lending(+) or borrowing(-) vis-à-vis ROW (c)
General government balance (c)
Cyclically-adjusted budget balance (c)
Structural budget balance (c)
General government gross debt (c)
92-07
(a) Eurostat definition. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP.
97