Eurozone EY Eurozone Forecast December 213 Austria Belgium Cyprus Estonia Finland France Germany Greece Ireland Italy Luxembourg Malta Netherlands Portugal Slovakia Slovenia Spain
Outlook for Germany Strong domestic demand boosts growth Finland Estonia Ireland Netherlands Germany Belgium Luxembourg France Italy Austria Slovenia Slovakia Portugal Spain Greece Malta Cyprus Published in collaboration with
Highlights The German economy is expected to grow by.5% in 213, significantly outpacing the rest of the Eurozone. Growth is forecast to accelerate in 214, as low unemployment, strong wage growth and a revival of the housing sector benefit consumer demand. As external demand also picks up in the medium term, we expect GDP to increase by 1.7% a year in 215 17. Household consumption will be the key driver of the economy in the short term. As unemployment stabilizes at historically low levels, wages will continue to rise strongly they were up almost 3% year-on-year in Q3. The German labor market will also attract workers from the rest of the Eurozone, with net migration already at a 17-year high in 212. Moreover, low levels of household debt and favorable lending conditions imply there will be no constraints to the expansion of consumer spending in the coming years. We expect consumption growth to average 1% in 213 and 1.3% a year from 214. GDP growth 213. 5% GDP growth 1. 7% Households will also benefit from a revival of the housing market. After years of stagnating prices, the house price index was up 6.6% on the year in Q3. As a result, the rebound of construction investment in Q2 is expected to continue and activity in construction will act as a catalyst for private investment in the short term. Narrowing spare capacity will also stimulate capital spending in the longer term. We expect investment to expand 3.6% in 214, and by 3% a year in 215 17. The election in September did not deliver a majority in parliament for any of the main parties, but a coalition deal was secured between Angela Merkel s Christian Democratic Union and the Social Democratic Party (SPD) on 27 November. The deal still needs to be put to a referendum of the SPD s members, but this is likely to be passed. The introduction of a minimum wage, one of the key demands won by the SPD, should contribute to the upside risks to our consumption forecast. On the downside, the economy remains vulnerable to a worsening of external conditions, as a solid pickup in external demand has yet to materialize. 214 Consumer prices 214 1. 6% 214 Unemployment 5. 2% EY Eurozone Forecast December 213 Germany 1
Strong domestic demand boosts growth Growth to gain momentum from 214 Germany remains a pillar of stability in the Eurozone. According to the latest data, GDP grew by.3% on the quarter in Q3 and short-term indicators suggest economic activity continued to expand solidly in Q4. As a result, while the Eurozone will contract for the second successive year in 213, Germany is expected to grow by.5%. Rising domestic demand will be the key driver of growth in the short term. In particular, low unemployment, strong wage growth and a revival of the housing sector will allow GDP to increase by 1.7% in 214. The pace of expansion will be supported by a pickup in global growth in the medium term, as Germany benefits from a highly competitive and export-oriented manufacturing sector. We expect GDP growth to average 1.7% a year in 215 17. with household consumption leading the way Conditions are ripe for households to support an acceleration in growth. In particular, the jobless rate dropped to an historic low of 5.2% in September (on the International Labour Organization measure). The acceleration of growth in the short term will keep unemployment low, while the tight labor market will put upward pressure on wages. In Q3 213, negotiated wages rose by almost 3% on the year. Meanwhile, falling import and energy prices resulted in inflation declining to 1.2% in October. And pipeline inflationary pressure remains muted, despite the pickup in wage growth. We expect inflation to stabilize just above 1.5% from 214. The combination of strong wage growth and low inflation will lift real wages and support households purchasing power. The strength of the German labor market has not gone unnoticed, in particular when compared with the weak performance of the Eurozone periphery, where real wages and in some countries nominal wages have been falling in 212 13. Workers from the rest of the Eurozone have been attracted by job opportunities in Germany. Net immigration reached a 17-year high in 212, at 369, people, or.5% of the total population. This trend is likely to continue in the short term and will contribute to the expansion of the labor force and employment in Germany. Table 1 Germany (annual percentage changes unless specified) 212 213 214 215 216 217 GDP.9.5 1.7 1.7 1.7 1.7 Private consumption.7 1. 1.3 1.3 1.3 1.4 Fixed investment 1.3 1. 3.6 3.4 3. 2.7 Stockbuilding (% of GDP).1.1.1.1.1.1 Government consumption 1..9.8.7.7.8 Exports of goods and services 3.8.6 3.8 4.5 4.7 4.5 Imports of goods and services 1.8 1.2 4. 4.7 4.8 4.6 Consumer prices 2.1 1.6 1.5 1.6 1.7 1.7 Unemployment rate (level) 5.5 5.3 5.2 5.2 5.1 5.1 Current account balance (% of GDP) 7. 7. 6.9 6.7 6.7 6.6 Government budget (% of GDP).1..... Government debt (% of GDP) 81. 79.8 79.3 79.6 79.7 79.8 ECB main refinancing rate (%).9.5.3.3.3.4 Euro effective exchange rate (1995 = 1) 115.5 12.3 119.5 117.6 114.9 113.9 Exchange rate ($ per ) 1.28 1.32 1.29 1.25 1.22 1.2 2 EY Eurozone Forecast December 213 Germany
These factors, coupled with the low level of household debt and favorable lending conditions, imply consumer spending should continue to strengthen in the coming years. We expect consumption growth to average 1% in 213 and 1.3% a year from 214. German consumers are typically reluctant to increase spending and this is reflected in our forecast. As such, a stronger increase in spending is an upside risk to the forecast. Housing market shows no sign of cooling down Households will also benefit from a revival of the housing market. After years of stagnating prices, the house price index has been rising steadily and its growth reached 6.6% year-on-year in Q3. The resulting rise in housing wealth will provide further impetus to consumption growth. We expect house price growth to average 5.5% in 213 and to remain above 5% in 214, before easing in the medium term. Several factors will contribute to the rise in house prices in the short term. First, the sustained increase in household income, coupled with strong net migration, will support demand for houses and apartments. As supply will respond only after a lag, upward pressures on prices will be significant. Second, European equity and bond prices will remain volatile in the short term, as the Eurozone recovery is still uneven and markets remain sensitive to problems in the region. This will fuel investor demand for German properties, which appear to provide a positive and safe return. However, Germany s central bank has already warned that apartments in urban areas may be overvalued by 5% 1% on average and by as much as 2% in the more attractive locations. We also believe that annual house price growth of 8%, as in September, will not be maintained as supply increases in response to higher demand and investors move to more profitable assets as the global recovery gains momentum. Because of this, we expect house price growth to moderate gradually in 214 17. A sharp correction in property prices represents a low-probability downside risk to our baseline forecast in the medium term. The shock would affect the economy negatively via a fall in investment and a decline of household wealth and consumption. and investment benefits from lower uncertainty in the Eurozone Construction investment increased 2.6% on the quarter in Q2 213, recovering from a sharp decline during the exceptionally cold winter. Rising property prices create the conditions for a further increase of housing investment in the short term, although we expect the pace of expansion to moderate in comparison with Q2. Figure 1 GDP growth: Germany vs. rest of Eurozone Figure 2 Prices and wages % year 6 Other Eurozone Forecast % year 5 Forecast 4 4 2 2 3 2 Consumer prices 4 1 6 Germany 8 1994 1996 1998 2 22 24 26 28 21 212 214 216 Wages 1 1995 1998 21 24 27 21 213 216 Table 2 Forecast for Germany by sector (annual percentage changes in gross added value) 212 213 214 215 216 217 Manufacturing.2.2 2.2 2.5 1.8 1.4 Agriculture 1.6 1.6 2.2 2.2 2.2 2. Construction 1.6 1.6 1.4 1.7 1.3 1.1 Utilities 1.7 1.2 2.3 1.9 1.7 1.7 Trade.9 1.2 1.9 1.9 2.2 2.2 Financial and business services 2.2.6 1.6 1.6 1.8 1.8 Communications 2.1 2.5 4.1 3.8 3.9 3.8 Non-market services 1..5.5.3.8.9 EY Eurozone Forecast December 213 Germany 3
Strong domestic demand boosts growth Meanwhile, uncertainty at the Eurozone level has diminished in H2 213 and is expected to ease further as the recovery in the region broadens. Consequently, investment projects that had been put on hold in the last couple of years will be accelerated and completed. Credit conditions remain favorable, with the latest lending survey pointing to a further easing of lending standards by German banks in early 214. We expect private investment to expand 3.6% in 214, after a decline of 1% in 213. Germany experienced only a moderate widening of the output gap following a slowdown of growth in 212 13. As a result, rising capacity utilization will stimulate capital spending significantly in the medium term, as firms need to expand their production capacity. We expect investment growth to average 3% a year in 215 17. Coalition deal will see introduction of minimum wage As expected, the elections on 22 September did not deliver any of the main parties a majority in parliament. The Christian Democratic Union and Christian Social Union, led by Chancellor Angela Merkel, obtained 41.5% of the vote, their best result in more than 2 years. The vote strongly confirmed the leadership of Merkel. A coalition deal with the SPD was agreed on 27 November, with the negotiations bringing pension increases, motorway tolls for foreign drivers and the introduction of a minimum wage, at 8.5 an hour. According to its proponents, a minimum wage would boost consumption and relieve the state from income subsidies. Opponents argue that the introduction of a national minimum wage would hit the services sector where low-pay contracts are more common and lift unemployment. Merkel opposes the idea of a national minimum wage, although she conceded its introduction in order to avoid a more prolonged political stalemate. Approval of a minimum wage could have positive effects on consumption and represents an upside risk to our baseline forecast despite the possibility of some adverse impact on employment. While the coalition deal has to be ratified in a referendum of SPD members on 15 December, this political uncertainty is not expected to weigh on the economy. The Government balanced its budget in 212 and the country benefits from a safe-haven status within the Eurozone. This allows it to borrow at very low interest rates. The Government is expected to maintain the budget close to balance in the medium term, allowing public debt to remain stable just above 8% of GDP. Main downside risks lie outside Germany Downside risks to our baseline forecast stem mainly from the external sector. We expect activity in the rest of the Eurozone to recover gradually from 214, but conditions in the periphery remain challenging. Moreover, the emergence of anti-euro parties in some countries has worsened the political outlook in the region. A deterioration of conditions at the Eurozone level would continue to weigh on growth in Germany. In the extreme event of a Eurozone breakup, we estimate Germany s GDP would fall by at least four percentage points in the two years following the breakup. Finally, more than 6% of German exports are directed outside the Eurozone and emerging markets have been an important source of growth. While foreign orders continued to expand in mid-213, there is a risk that ongoing sub-par growth in emerging markets will result in a disappointing export performance in the medium term, especially if investment in key emerging markets is weaker than expected. Similarly, exports may fall short of our forecast of 4.5% growth in the medium term if the euro does not decline from its recent peak, as envisaged in our forecasts. Figure 3 Consumption and investment % year % year 5 Forecast 2 4 3 2 1 Consumption (right-hand side) 16 12 8 4 Figure 4 Government balance and debt % of GDP 2 2 4 Government balance (left-hand side) % of GDP Forecast 1 8 6 6 4 1 4 8 2 3 Investment (left-hand side) 8 12 1 Government debt (right-hand side) 2 4 1992 1995 1998 21 24 27 21 213 216 16 12 1978 1982 1986 199 1994 1998 22 26 21 214 4 EY Eurozone Forecast December 213 Germany
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