Research Dept. News
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Monthly Report, num 345 - April 2011
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European union - Germany
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Good times for the German economy
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Dynamic German consumption in the early part of the year.
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After the slowdown in economic activity in the fourth quarter of 2010, mostly due to the bad weather, a robust recovery could be observed in the early part of 2011. Both domestic and foreign demand seem to have contributed to the current expansion.
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Expectations of higher employment and wage rises are boosting consumption. Retail sales rose by 2.6% in real terms in January compared with the same month the year before. Moreover, passenger car registrations are showing notable energy in spite of the rise in fuel prices. In the first two months, automobile sales posted a year-on-year increase of 15.8%. The outlook for consumption is favourable, although its growth will probably moderate, as seems to be indicated by a slight decline in consumer confidence in the last three months up to February, affected by inflation picking up.
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The catastrophe in Japan should only affect German exports to a very slight degree.
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Similarly, investment looks strong, given the good tone of demand and the increase in industrial capacity utilization. In fact, use of this investment in the production of capital equipment is above its long-term average.
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The future also looks brighter for foreign trade. January's figures show an upward trend for exports and expectations are good, although there is likely to be some slowdown compared with the strong growth of 2010, although not so much because of the situation in Japan after the earthquake in March, given that Japan's share of the country's exports is relatively small. With regard to imports, these rose appreciably in January but especially due to rising prices.
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The situation is also favourable on the supply side. Industrial production continued to progress in January, recording a year-on-year increase of 12.4%. The rise in industrial orders reinforces the position of the secondary sector. However, what is most surprising is the spectacular recovery by the construction industry, which grew by 36.3% in January compared with the previous month, after a decline at the end of 2010 because of bad weather conditions. Moreover, services are also included in the general improvement and the hotel sector recorded a notable rise in its turnover in the month of January.
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These good macroeconomic figures are reflected in the labour market. The level of employment rose by 0.1% in January, seasonally adjusted, compared with December and by 1.2% compared with the same month last year. In February, the BA-X employment demand index reached a peak, as can be seen in the graph below, indicating the favourable perspectives for the labour market. The unemployment rate therefore continued to fall to 7.3% in February, its lowest level for several years.
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Spectacular recovery by the construction industry after its decline at the end of 2010.
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In contrast, demands for wage increases have intensified. However, it looks like unit labour costs will be contained due to higher productivity. On the other hand, the rate of inflation continued to rise in February, for the fourth consecutive month, up to 2.1%, passing the level of 2% for the first time since October 2008. This upswing was basically due to energy prices as core inflation, which excludes the most volatile components, remained at 1% in February. Nonetheless, we have raised our forecast for average annual inflation by 2 tenths of a percentage point to 2.1%.
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German GDP will speed up in the first quarter.
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In summary, GDP will speed up in the first quarter of 2011, after having posted 0.4% quarter-on-quarter growth in the fourth quarter of 2010. However, we then expect it to ease off and, for 2011 as a whole, post an annual rise below 2010's rate of 3.5%, which we place at 2.4%. This slowdown is particularly due to the rebound effect after the Great Recession of 2008-2009 wearing off, as well as to the repercussions of a restrictive budgetary policy in 2011. The impending hike in the official interest rate by the European Central Bank should not appreciably affect the German economy if real interest rates remain low.
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