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Blog Carsten Brzeski

German economy accelerated (less than expected) in 4Q 16

Spoiled by Christmas. The sharp fall in economic activity in December, due to the cold weather and the long Christmas break, left some marks on the German economy.

GDP growth in the fourth quarter came in slightly lower than expected, at 0.4% QoQ, from 0.1% QoQ in the third quarter. On the year, the German economy grew by 1.2%. Today’s data confirms the first estimate of 2016 growth at 1.9% YoY, the best growth performance since 2011. These 2016 figures lead to a statistical carry-over of 0.5%, ie even if the economy would stagnate in all four quarters of 2017, annual GDP would still come in at 0.5% YoY.

The Germany's 2016 growth story has been well told, but for the few who still wonder where strong growth is coming from, here it is again: the strong labour market, low interest rates, low inflation, higher wages and increased government consumption due to the influx of refugees. The construction sector is currently probably the most single most important domestic growth driver. At the same time, net exports should have been a drag on growth.

While the headline figures suggest that the German economy has been totally immune against Brexit and Trump, volatile monthly data throughout the year tell a slightly different story. External factors have and should continue to hit the German economy at its most vulnerable parts: industrial production and exports. Consequently, the German growth performance in 2017 will highly depend on the domestic side of the economy (once again). With increased uncertainties in two of the most important trading partners (the US and the UK) and political uncertainties in the Eurozone, significant downward risks for 2017 come from the outside world. Beyond 2017, however, probably the biggest risk are the upcoming elections in Germany itself. Not so much because of an unexpected populist outcome, but because the upcoming election campaign will again postpone important policy decisions and new reforms until after the elections.