Eurozone EY Eurozone Forecast September 2014 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Latvia Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain
Outlook for Germany Recovery to regain momentum Finland Estonia Latvia Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Malta Cyprus Published in collaboration with
Highlights The recent falls in business and consumer sentiment, coupled with the 0.2% drop in GDP in Q2, suggest that the German economy, the Eurozone s main growth engine, may have stalled. But despite this weakness, more recent data still points to reasonable growth and suggests that the weak GDP outturn in Q2 was probably mainly due to temporary factors. Indeed, we think that Germany will be one of the region s strongest performers over the coming quarters and forecast GDP to grow by 1.5% this year and 2% in 2015. We expect a key driver of growth in Germany over the next year or two to be household spending. Although there have recently been signs that employment growth is starting to slow, the record-low unemployment rate and the imposition of a minimum wage next year suggest that wage growth will continue to strengthen, which should prompt real disposable income growth to rise. GDP growth 2014 1. 5% GDP growth 2. 0% Unlike their counterparts in many other parts of the Eurozone, German households have little need to deleverage. Against this backdrop, we expect consumer spending growth to rise from 0.9% this year to 1.7% in 2015, before falling back thereafter. The recent fall in the euro and improving global demand are welcome signs for exporters. In addition to this, rising profits and low interest rates suggest that investment growth will also strengthen. Meanwhile, rising house prices could result in a period of reasonably high residential construction investment too. Overall, we forecast a period of solid growth. Accordingly, the risk of deflation is low. The main near-term risk to the forecast is a further escalation in the Russia-Ukraine crisis. Indeed, if this were to threaten Russian gas supplies to Germany and the rest of Europe, it could damage the recovery in Germany and the Eurozone as a whole. 2015 2014 Unemployment 5. 1% Consumer prices 2014 1. 1% EY Eurozone Forecast September 2014 Germany 1
Recovery to regain momentum Eurozone growth engine lost momentum in Q2 The German economy charged out of the blocks at the beginning of 2014, but much of the data published over the past couple of months gives the distinct impression that the recovery has ground to a halt. Admittedly, a repeat of Q1 s quarterly rise in GDP of 0.7% was highly unlikely in Q2, as much of the Q1 strength reflected a weather-related surge in construction during the winter months that would be reversed in Q2. Nonetheless, the quarterly pace of growth of household spending and equipment investment also slowed in Q2. Accordingly, while much of the movement of growth over recent quarters is merely noise, there are tentative signs that the underlying pace of expansion may have weakened. All of this, coupled with the slowdown in the more recent Ifo Institute for Economic Research survey of business sentiment at the beginning of Q3, perhaps in part due to the intensification of the Ukraine crisis, suggests that our June forecast for a rise in GDP of 2% this year is now too optimistic. Nevertheless, we still expect quarterly GDP growth to average a solid 0.4% or so in the second half of the year, which would result in 1.5% growth for 2014 as a whole. Despite slowing, on past form the Ifo Institute s business expectations index is still consistent with reasonably solid GDP growth. It is also worth noting that the less-closely watched Ifo measure of services sentiment increased for a fourth straight month in July, and while consumer confidence has recently fallen, the decline has been small and from a near threeyear high. Household spending prospects remain solid Having lost momentum in the second half of 2013, Germany s household spending growth has since picked up, reflecting rising real disposable incomes. We expect further solid growth over the coming quarters. Admittedly, with the unemployment rate at a record low and the working-age population likely to rise only modestly at best, there is limited scope for strong employment growth. But rising wage growth, particularly next year when a minimum wage is introduced, suggests that income growth will accelerate, even if it prompts a modest rise in unemployment as firms lay off some lower-paid workers. Table 1 Germany (annual percentage changes unless specified) 2013 2014 2015 2016 2017 2018 GDP 0.2 1.5 2.0 1.9 1.6 1.5 Private consumption 1.0 0.9 1.7 1.5 1.4 1.3 Fixed investment 0.6 2.5 2.1 3.7 2.8 2.4 Stockbuilding (% of GDP) 0.9 0.5 0.0 0.1 0.1 0.1 Government consumption 0.7 0.8 0.6 0.6 0.6 0.7 Exports of goods and services 1.1 3.5 4.5 4.7 4.3 4.1 Imports of goods and services 1.6 5.5 5.2 4.9 4.6 4.4 Consumer prices 1.6 1.1 1.8 2.2 2.0 1.5 Unemployment rate (level) 5.3 5.1 5.4 5.6 5.4 5.3 Current account balance (% of GDP) 7.1 7.1 6.8 6.6 6.4 6.2 Government budget (% of GDP) 0.0 0.0 0.2 0.1 0.2 0.2 Government debt (% of GDP) 78.4 78.6 78.5 78.2 78.1 78.2 ECB main refinancing rate (%) 0.5 0.1 0.1 0.1 0.2 0.8 Euro effective exchange rate (1995 = 100) 120.8 123.6 119.9 118.8 118.8 118.4 Exchange rate (US$ per ) 1.33 1.34 1.27 1.24 1.24 1.23 2 EY Eurozone Forecast September 2014 Germany
With little need for households to deleverage household debt as a share of income has been on a downward trend since 2000 and consumer confidence fairly buoyant, we expect strengthening income growth to result in a pickup in consumer spending. Our forecast is for household spending growth to increase from 0.9% this year to 1.7% in 2015, and to average just under 1.5% in 2016 18. Outlook for investment is improving too Although German GDP is now almost 3% above its pre-crisis peak, the level of investment only surpassed its 2008 high late last year and has only edged up slightly since then. In the near term, firms are likely to remain cautious due to the problems in Ukraine. However, further ahead, the prospects for investment appear reasonably encouraging. For a start, in contrast to the Eurozone as a whole, we think that Germany has little remaining spare capacity in its economy, which bodes well for investment prospects. Profit growth has recently been on an upward trend and previously this has tended to be associated with rising investment. In addition, we think that the deleveraging in the banking sector that has taken place over the past 18 months could ease or come to an end once the European Central Bank (ECB) asset quality review and bank stress tests are completed later this year. This, combined with the fact that the ECB s targeted longer-term refinancing operations began this month, could lead to an increase in the supply of bank lending to non-financial firms over the coming quarters and help to support investment. Finally, we think that residential construction investment, which has increased by more than 20% over the past three years, will continue to climb, given the relative strength of the German housing market. Based on all this, we expect investment to strengthen over the next two years before slowing thereafter. Conflicting forces hit exporters The past quarter has brought mixed news for exporters. On the one hand, the euro has stopped appreciating and is now almost 7% below its May peak against the dollar. But the potential benefits that this will bring have been at least partly offset by the imposition of sanctions on exports from European Union (EU) economies to Russia and the fears of an escalation of the crisis in Ukraine. Figure 1 GDP growth: Germany vs. rest of Eurozone Figure 2 Consumption and personal disposable income % year 6 4 Other Eurozone countries Forecast % year 4 3 Consumption Forecast 2 2 0 2 4 1 0 1 2 Personal disposable income 6 Germany 3 8 2000 2002 2004 2006 2008 2010 2012 2014 2016 4 1999 2002 2005 2008 2011 2014 2017 Table 2 Forecast for Germany by sector (annual percentage changes in gross added value) 2013 2014 2015 2016 2017 2018 GDP 0.2 1.5 2.0 1.9 1.6 1.5 Manufacturing 0.5 1.8 2.9 2.1 1.4 1.3 Agriculture 0.9 2.3 2.1 2.2 2.3 2.3 Construction 1.1 2.4 1.6 1.7 1.1 0.8 Utilities 0.3 1.3 1.9 1.8 1.7 1.4 Trade 1.0 1.9 2.2 2.4 2.1 1.8 Financial and business services 1.2 1.4 1.8 2.1 1.9 1.6 Communications 0.9 3.0 3.9 4.4 4.1 3.8 Non-market services 0.0 0.7 0.8 0.8 0.9 1.0 EY Eurozone Forecast September 2014 Germany 3
Recovery to regain momentum On the face of it, the direct effects of the sanctions on German exports should be minimal. Last year, only 3.2% of German exports went to Russia and only a tiny proportion of these exports will be affected by the EU s tier 3 sanctions and the counter-sanctions imposed by Russia. However, a recession in Russia and the likely tightening of credit conditions in response to the financial sanctions imposed by the West may lead to pretty sharp falls in German exports to Russia. Given this, and the fact that it may take time for exporters to feel the benefits of the weaker euro, exports may remain sluggish in the near term. However, with global demand growth likely to accelerate next year and the euro probably continuing to weaken in response to the expected widening in US-Eurozone interest rate differentials, we forecast export growth will pick up from about 3.5% this year to 4.5% next year. Risks remain broadly balanced Overall, we are forecasting that GDP growth will pick up from a solid 1.5% this year to 2% in 2015, before gradually slowing to around 1.5% by 2018. In the near term, the main downside risk stems from the crisis in Ukraine. Our central view is that the ongoing tensions, which may have played a role in the recent falls in business sentiment, may result in slightly weaker growth in Germany than we had previously expected over the second half of 2014. However, looking further ahead, the risks to our central forecast probably lie to the upside. The strong fundamentals of the German economy and very accommodative monetary policy mean that a sustained period of above-trend growth should not be ruled out. In addition, low interest rates and rising wages could push house prices significantly higher, leading to a residential construction boom. And given the weakness of inflation and the recent strength of inward migration, our assumption that there is little spare capacity in the German economy could be wrong. If this were the case, then the extra spare capacity could result in GDP growth being a bit stronger than our central forecast assumes over the next few years. Figure 3 GDP and Ifo Institute business expectations index Figure 4 Harmonized index of consumer prices inflation Average = 100 120 % quarter 3 % year 5 Forecast 115 110 105 100 GDP (right-hand side) 2 1 0 4 3 95 1 2 90 85 80 75 Ifo business expectations index, advanced two months (left-hand side) 2 3 4 1 0 70 2000 2002 2004 2006 2008 2010 2012 2014 Source: Oxford Economics; Haver Analytics. 5 1 1995 1998 2001 2004 2007 2010 2013 2016 4 EY Eurozone Forecast September 2014 Germany
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