Research Dept. News
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Monthly Report, num 310 - February 2008
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European Union - Germany
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Germany: 2007 was a good year and now what?
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In 2007, Germany grows much more than expected one year ago, balances its public accounts and creates employment.
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Germany continues to benefit from its best economic stage since the end of the Nineties. According to early figures from the Federal Statistics Office, in 2007 the German economy grew by 2.5%, slightly below the 2.9% in 2006. When adjusted for effective days worked, these figures turn into an increase in gross domestic product (GDP) of 2.6% in 2007 and 3.1% in 2006. In order to find various consecutive years with growth of 2% or more we have to go back to 1998-2000.
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It should be remembered that one year ago there was real concern about the impact of an increase in value added tax and that the forecasts most analysts were putting out suggested growth would be a mere 1.5% in 2007. In the end, private consumption scarcely dropped in 2007 and this movement was more than compensated by the bigger drive from public consumption and the contribution of the foreign sector. Furthermore, the year end up with a budgetary balance and an increase of 1.7% in the number of jobs (net job creation was 650,000).
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Latest trends suggest gradual cooling down of economy in final stages of 2007.
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Recent indicators confirm that Germany’s economic drive has remained strong until very recently. But they raise a qualification: there has been a downturn in recent months. Consumption indicators show a lack of drive in this domain. For example, retail sales were down by 3.1% in November and consumer confidence dropped in November and December. Penalized by the euro exchange rate, exports have begun to grow at a lower rate. Whereas six months ago in May foreign sales (as movable 12-month average) were growing by 13.3% year-on-year, in November they had slowed to 9.7% year-on-year.
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Industrial production, following various months of strong growth, dropped by nearly three percentage points in November. After a surprising rise in November, the IFO industrial activity index dropped by 1.2 percentage points in December picking up the course of decreases that began last June. We do not feel that the rise in January (0.4 points) will exclude further drops over the short term. Overall, this group of indicators confirms a recent trend to lower growth.
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Germany still benefitting from support of strong labour market.
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Nevertheless, to avoid an overly dramatic point of view, it should be remembered that some essential fundamentals of Germany’s economy remain strong. The labour market particularly is showing a good situation so that this is becoming an important pillar of support. The unemployment rate dropped by two decimals in December going to 8.4%, a level 1.4 points lower than that recorded one year earlier. Employment figures for November confirm that for the third consecutive month the total number of those employed stood above 40 million.
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The prices front, which is a concern in Europe, also shows a less alarming aspect in the case of Germany. The German CPI grew by 2.7% year-on-year in December down four decimals from November. Only three of the twelve states using the single currency last year showed an easing of inflation in December. Furthermore, in spite of the fact that the German press has made much of the fact that the railway company has accepted an 11% wage revision for its drivers, Germany’s containment on the wages front remains notable. Unit labour costs grew by a mere 0.2% year-on-year in the third quarter while hourly wages grew by a modest 1.3% year-on-year in October. It would thus seem unlikely that there is wage pressure enough to easily pass through to final prices.
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