Germany 2018-2019 scenario
Growth continues to be strong, but is exposed to more vulnerable foreign demand
The period of strong economic growth experienced last year is now behind us, having given way to a more moderate, but still solid, pace. Following a Q1 marked by a significant slowdown in GDP, characterised by a decline in government spending during a transition period focused on forming a viable coalition and by a significant fall in exports, we believe that growth could return to a more moderate trend in the coming quarters. Domestic demand remains firmly robust, as reflected by the buoyant private consumption and still positive investment momentum. Job creation figures and growth in real wages reflect economic expansion. Companies have the capacity to improve their margins and invest if needed. Our scenario is now based on annual growth that has been revised down to 2% in 2018, due to a lower carry-over in Q1, and a slowdown in growth to 1.8% in 2019, given the escalation of US protectionist measures.
Household consumption remains driven by a favourable wage outlook and strong growth in job creations. The financial situation of households is improving to the benefit of domestic demand. However, rising oil and commodities prices contribute to inflation growth and curb their purchasing power. The unemployment rate continues to decline, drawing on underemployed workers, without coming up against short-term supply constraints.
Public consumption is likely to pick up after the decline observed in Q1 that was due solely to a government that was reduced to everyday matters pending the formation of a coalition. The concessions made to the social democrats to get them to join this new government coalition will materialise in the form of significant spending increases. Retirement replacement rates maintained at 48%, additional investment spending and tax cuts will all reduce the budget surplus that has accumulated over the past years, without hampering the downward path of debt.
Investment is the second pillar of growth after consumption. It will continue to be driven by construction and, to a lesser extent, by productive investment. The former is following a durable catch-up trend of supply with demand. The latter is determined by company margins and order books, and will thus depend more on the level of demand.
The trade balance could weigh more on growth after the entry into force in July of the US trade tariffs of 20% on steel and 10% on aluminium. The escalation of US tariff hikes against China leads to fears of new measures targeting the German auto sector, which remains a major supplier of European vehicles to the US.
On the political front, the Chancellor is now being contested by her Bavarian CSU ally, who is attacking the migrant policy, in the aim of toughening conditions for the reception of refugees, in the context of legislative elections coming up in October.
Philippe VILAS-BOAS, Group Economic Research