Carsten Brzeski, Senior Economist, ING Belgium

German Growth ‘Normalisation’… Whatever That Might Look Like

Carsten Brzeski, Senior Economist, ING Belgium

Back to normal. After a strong second quarter, the German economy has returned to its potential growth rate in the third quarter. According to the first estimate of the German statistical office, the economy grew by 0.3% QoQ, from 0.7% QoQ in 2Q. On the year, German GDP is up by 1.1%, from 0.9% in 2Q. The individual growth components will only be released at the end of the month but available monthly data and the statistical office’s press release suggest that growth was driven by domestic demand.

Private consumption, investments and construction increased, while net exports weighed on growth. Interestingly, German private consumption growth since 2009 has been the strongest of all Eurozone countries, except for Luxembourg. In fact, the German economy is already in a longer process of rebalancing, just out if its own.

The German economy remains the stronghold of the Eurozone. Looking ahead, there is little reason to doubt the stability of the German economy. The positive mix of record high employment, wage increases and strong external demand for German products should remain in place for a while.

Latest soft indicators confirm this bright picture. Since the start of the year, order books have increased by more than 7% and there are encouraging signs that industrial production should rather accelerate than decelerate in the coming months. Production plans are at the highest level in more than two years and inventories just dropped to the lowest level since September 2011, boding well for future industrial production.

If anything, the next government should further boost growth. At least in the short run. Just think of the minimum wage and possibly some tax relief. As regards the medium term outlook, however, the impact from the next government is still uncertain, given the lack of decisions taken so far.

Two factors clearly call for new reforms: i) the fact that the labour market is close to its natural rate of unemployment; and ii) the wide investment gap. To improve Germany’s growth potential, it will be important that the new government will not only reap and redistribute the harvest of earlier economic reforms but actually also seeds new reforms.

In this regards, the controversially discussed European Commission announcement to investigate Germany’s trade surplus could eventually bring some tailwind for the coalition talks. To be clear, strictly speaking, the EC is not investigating Germany’s trade surplus but a long list of 11 indicators, intended to signal macro-economic imbalances. Germany breaches the thresholds for the current account surplus, government debt and the loss of market shares.

Obviously, no one will seriously ask the Germans to export less or to close their factories for a long “Eurozone rebalancing vacation”. Neither will the Commission ask German companies to become less competitive. Interestingly, Germany’s trade surplus stems from strong demand from outside the Eurozone. With the rest of the Eurozone, Germany’s trade balance is already in balance.

In our view, it is not about the exports as such but about what the Germans do with these surpluses. Investing it abroad has not been a successful strategy. Therefore, stimulating domestic investments could be the missing link, pleasing both the Germans and the European Commission. As such, the European Commission could provide the next German government with some welcomed tailwind. Even if it is tailwind in a tea cup.

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