Eurozone EY Eurozone Forecast March 2014 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Latvia Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain
Outlook for Germany Strong domestic demand boosts growth Finland Estonia Latvia Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Malta Cyprus Published in collaboration with
Highlights Following modest growth of 0.5% in 2013, German GDP is forecast to expand by 1.7% in 2014. In contrast to some of its neighbors, German consumers, businesses and the public sector are all relatively unshackled by debt. This should allow improving confidence to translate into solid domestic demand over the next year. Investment is set to rebound this year, growing by some 3.8% and contributing around 0.4 percentage points to GDP growth. The turnaround (after two years of decline) will be driven by greater confidence in the economic outlook, as well as supportive financial conditions and diminishing spare capacity. Germany will benefit from a pickup in the rest of the Eurozone, while faster growth in the UK and US should also help to support exports. Consumer demand will also support growth. Unemployment averaged 5.3% in 2013, and we expect this to fall slightly to 5.1% this year. And youth unemployment is comparatively low, averaging 7.7% in 2013, far lower than in many European economies. Households are also in a strong financial position, with low levels of debt. These two factors combined will encourage greater spending on expensive items. Overall, we expect private consumption to grow by 1.1% this year and then by almost 1.4% a year in 2015 18. GDP growth 2014 1. 7% GDP growth 1. 7% But consumer demand could surprise on the upside, particularly with the introduction of a minimum wage from 2015. However, a minimum wage also risks lifting unemployment, particularly among the young and unskilled. And there are other downside risks. Germany remains very sensitive to external developments. Exports to emerging markets have been an important driver of growth and a number of key countries could experience a slowdown in growth. We expect solid expansion of about 1.7% to be sustained in 2015, and this growth will be broadly balanced. A more entrenched recovery is expected in an international context, and this will be reflected in greater production levels and strong export growth. 2015 Consumer prices 2014 2014 1. 5% Unemployment 5. 1% EY Eurozone Forecast March 2014 Germany 1
Strong domestic demand boosts growth Solid growth expected in 2014 and business investment is set to rebound National accounts data reveals that German GDP expanded by 0.5% in 2013 as a whole, with net trade providing a significant boost in the final quarter. We now expect GDP growth of 1.7% in both 2014 and 2015. A rebound in exports in the middle of 2013 helped to lift business confidence during the second half of the year, and this was accompanied by a pickup in non-residential business investment. The Ifo Institute surveys have risen to levels substantially above their long-term averages, and business investment grew by an estimated 1% and 1.1% in Q3 and Q4 2013 respectively. We expect this pickup in business investment to be sustained over the next couple of years. Business expectations rose to their highest level since 2011 in January, and recent Purchasing Managers Index readings have seen substantial expansion in new work received by German manufacturers. Backlogs of work continue to build, suggesting that industrial capacity is tight. Meanwhile, financing conditions are conducive to investment. German companies do not have any pressing need to deleverage and currently have substantial cash piles. These large cash deposits will need to be utilized and there is greater incentive to do so as firms become more confident in their prospects: shareholders will want to see cash either invested or returned as dividends, and large cash piles also raise the risk of hostile takeovers. Therefore, companies will increasingly look for viable investment opportunities. Equity prices have also risen substantially over the past year, providing a solid backdrop for raising funds through share issues, while the European Central Bank s policy interest rate is also expected to remain very low for a number of years. The first rate rise is not expected until Q3 2017. As a result, the yield curve only rises gently and from very low levels. This should enable firms to lock in low interest rates on loans and bond issues, increasing the viability of investment projects. While the latest bank lending survey for Q1 2014 does suggest a modest tightening of lending conditions, this follows three relatively upbeat surveys. The overall cost of capital faced by companies is at very low levels. Table 1 Germany (annual percentage changes unless specified) 2013 2014 2015 2016 2017 2018 GDP 0.5 1.7 1.7 1.5 1.6 1.6 Private consumption 1.0 1.1 1.8 1.1 1.2 1.3 Fixed investment 0.7 3.8 3.3 2.9 2.7 2.4 Stockbuilding (% of GDP) 0.0 0.1 0.2 0.2 0.2 0.2 Government consumption 0.4 0.6 0.7 0.7 0.8 0.9 Exports of goods and services 0.6 4.0 4.1 4.4 4.5 4.0 Imports of goods and services 0.9 4.1 5.1 4.6 4.5 4.1 Consumer prices 1.6 1.5 2.2 2.9 2.5 1.6 Unemployment rate (level) 5.3 5.1 5.2 5.4 5.4 5.3 Current account balance (% of GDP) 7.4 7.2 6.6 6.5 6.4 6.4 Government budget (% of GDP) 0.3 0.0 0.2 0.1 0.2 0.2 Government debt (% of GDP) 80.1 79.6 79.3 78.8 78.5 78.4 ECB main refinancing rate (%) 0.5 0.3 0.3 0.3 0.4 1.4 Euro effective exchange rate (1995 = 100) 120.8 120.7 118.0 115.8 114.8 114.7 Exchange rate ($ per ) 1.33 1.30 1.25 1.22 1.20 1.20 2 EY Eurozone Forecast March 2014 Germany
For these reasons, we expect overall investment to grow strongly in 2014 and 2015, by 3.8% and 3.3%, respectively, adding around 0.4 percentage points to annual GDP growth for these years. The expansion in capacity will help reduce the scope for inflation, which is important, given the fact that monetary policy is being set for the wider Eurozone rather than for Germany. Current account surplus should stop rising We would expect some of this investment to leak into imports, which are expected to grow strongly over the next few years, also supported by strong consumption. However, simultaneous growth in exports will prevent the current account surplus from falling noticeably. Indeed, exports are projected to rise sharply over the next couple of years by 4% this year and 4.1% in 2015 in line with growth in demand from Germany s key trading partners. This will provide an impetus for German industry, and will help to drive job creation and investment over the coming years. Consumer spending will underpin growth Despite signs of a small contraction in Q4 2013, consumer spending will continue to provide a solid foundation for growth through 2014, and this will be supported by a number of factors. Households are in a strong financial position following sustained deleveraging since 2007. And household liabilities have fallen as a share of income, from over 100% in 2007 to under 90% in 2013. Households therefore do not face an uphill struggle against mounting financial liabilities and deleveraging is not required, in contrast to most other European economies. Meanwhile, house prices increased by 4.9% in 2012 and a further 5.6% in 2013, and we expect similar growth in 2014. While home ownership in Germany is lower than the Eurozone average, it has risen a lot in recent years, to almost 50%, and this rise should provide wealth effects for those who own properties although it could result in higher rental costs for those who do not. But in any case, it should help to stimulate the construction industry, boosting employment across the country. Furthermore, German equities have performed particularly well recently, increasing by 21.3% in 2013, and this will also provide wealth effects. Meanwhile, unemployment has remained low, averaging 5.3% in 2013. This was far below the Eurozone average of 12.1%, and has been underpinned by the relatively strong growth seen in Germany over the past few years. But it also reflects the reforms undertaken during the early 2000s as part of Agenda 2010. These measures, combined with Germany s well-engrained system of vocational training for school leavers, have also helped to keep youth unemployment relatively subdued, at just 7.7% in 2013 as a whole. Figure 1 GDP growth: Germany vs. rest of Eurozone Figure 2 Current account % year 6 Forecast % of GDP 12 Forecast 4 2 Rest of Eurozone 10 8 6 Merchandise trade Current account 0 4 2 2 4 0 2 6 Germany 4 Services and transfers 8 2000 2002 2004 2006 2008 2010 2012 2014 2016 6 2000 2002 2004 2006 2008 2010 2012 2014 2016 Table 2 Forecast for Germany by sector (annual percentage changes in gross added value) 2013 2014 2015 2016 2017 2018 GDP 0.5 1.7 1.7 1.5 1.6 1.6 Manufacturing 0.0 2.4 2.3 1.6 1.3 1.4 Agriculture 0.0 1.8 2.4 2.3 2.4 2.3 Construction 1.2 2.2 1.3 1.3 1.0 0.9 Utilities 0.1 1.3 2.0 1.5 1.8 1.8 Trade 1.1 2.2 1.9 1.7 2.0 2.0 Financial and business services 1.1 1.5 1.5 1.5 1.7 1.7 Communications 1.5 3.7 4.1 3.7 3.9 3.8 Non-market services 0.1 0.4 0.5 0.5 0.8 1.0 EY Eurozone Forecast March 2014 Germany 3
Strong domestic demand boosts growth Looking ahead, rising new orders and backlogs of work support our outlook of sustained employment growth through 2014. The unemployment rate should fall slightly to 5.1% for the year as a whole. While this will not directly boost the spending power of consumers, consistently low unemployment will lift consumer confidence and encourage greater spending in the future. supported by strong real wage growth But labor market tightness will help to lift growth in nominal wages, which are also expected to be boosted temporarily from 2015 after the introduction of a minimum wage. This was one of the key agreements of the coalition negotiations that followed the elections last September, and will be introduced from 2015, at 8.50 an hour. It will be introduced gradually, however, by allowing existing collective wage agreements below this threshold to be phased out on their own terms over two years. Against a backdrop of relatively subdued inflation, weighed down by falling import prices and restrained growth of energy prices, we expect to see a healthy real wage increase, which will be the key to sustained growth in consumption in the long run. We expect inflation to average 1.5% in 2014. All of these factors will provide German households with the scope to lift spending, and are also lifting the sentiment of German consumers, which can be seen in recent confidence surveys. We therefore expect comparatively strong consumer spending growth of 1.1% in 2014 and 1.8% in 2015. Introduction of minimum wage will have some drawbacks Although the minimum wage offers some upside risk in the near term, it also poses downside risks over the medium term. Some workers may not be productive enough to warrant being paid the minimum wage, and thus unemployment among these workers will increase. Over time, unemployment will rise, which will dampen domestic demand and lead to a rise in transfer payments money which could be spent on more productive investments. The young are expected to be the most affected by the introduction of a minimum wage. While a large number of young employees will benefit from a rise in their disposable incomes, some will inevitably lose their jobs. Meanwhile, rising unit labor costs would dampen corporate profitability, which in turn may weigh on investment, while a modest fall in competitiveness will also affect exports. The current account surplus would fall marginally, as a result of both weaker export growth and slightly stronger imports, and we would also expect to see a rise in the structural unemployment rate. Overall, risks are broadly balanced There are also downside risks stemming from the external sector. Around 40% of German exports are directed to the Eurozone and banks foreign claims on troubled peripheral countries still accounted for 13.5% of total foreign claims in Q2 2013. As a result, Germany would be severely hit in the event of a prolonged period of deflation in the Eurozone, which would raise renewed doubts about the Eurozone s viability and generate a sharp contraction in output. Furthermore, the emerging markets, which take a growing share of German exports, are currently undergoing a period of volatility, and this could result in a slowdown in exports. Tight spare capacity could also pose a threat to Germany. While the overarching risk to the Eurozone as a whole is a slide into deflation, German capacity is increasingly tight and unemployment is extremely low. With the introduction of a minimum wage from 2015, this combination of factors could lead to a higher level of inflation than currently expected. This would cause a deterioration in the purchasing power of households and a stagnation of demand. But overall risk in Germany is expected to remain low, due to the economy s strong fundamentals. The introduction of a minimum wage could also increase consumer spending, while private companies are in a good position to benefit from a pickup in global growth. Furthermore, the Government achieved a small fiscal surplus back in 2012, so it is well positioned to stimulate growth through substantial fiscal expansion, should there be a marked deterioration in the economic environment. Figure 3 Unemployment % 12 Forecast 11 10 9 8 7 6 5 4 2000 2002 2004 2006 2008 2010 2012 2014 2016 4 EY Eurozone Forecast March 2014 Germany
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