Carsten Brzeski's blog

German economy remains "island of happiness"

With GDP growth at 1.9%, the German economy in 2016 once again defied an entire series of downside risks, thanks to strong domestic demand.

It is a strange habit of the German statistical office to release GDP data for the entire past year before actually publishing fourth quarter data. According to the just released numbers, German GDP increased by 1.9% in 2016, from 1.7 in 2015. Adjusted for differences in working days, German GDP increased by 1.8%, from 1.5% in 2015. In our view, this outcome suggests that the German economy has probably grown by some 0.5% QoQ in the fourth quarter. The German economy has once again defied several deep hits. Despite the stock market crash in China, Brexit, Turkey, Trump and Italy, the economy performed its best growth year since 2011. Strong domestic demand has shielded the German economy against most external risks.

Also this morning, the statistical office also released a first estimate of Germany’s 2016 fiscal balance, providing more arguments for the critics of too weak German public investment. For the first time since 1961, the German government recorded a fiscal surplus in three consecutive years. According to the statistical office, the fiscal surplus came in at 19.2bn euro (0.6% of GDP) in 2016, from 0.7% of GDP in 2015. German austerity fetishists will love it.

Yesterday, German newspapers reported on the fiscal surplus, instead of the initially planned balanced budget. The fiscal surplus is mainly the result of higher tax revenues and lower interest rate payments. At the start of 2016, Finance Minister Schaeuble was worried that additional spending related to the refugee crisis could lead to a fiscal deficit. This is why the government had entirely transferred the 2015 fiscal surplus into the 2016 budget to finance the costs of the refugee inflow. In line with the 2015 decision, the 2016 fiscal surplus should also be transferred into the reserve fund for the refugee crisis. However, in an election year, electoral presents normally hang lower than in any other year. This is why today’s fiscal numbers will not only revive the international but also the domestic debate on more government investments and tax cuts.

With today’s numbers, the economic year 2016 can almost be filed away. It was a year in which the German economy proved to be more robust than many thought and in which the economy weathered a series of external risks extremely well, thanks to strong domestic demand. In fact, the often controversially discussed refugee crisis and the ECB’s ultra-loose monetary policy turned out to be an economic blessing, artificially extending the long, positive cycle of the economy. The year 2017 will in our view look very much like 2016, only with a bit less of everything. Domestic demand, ie construction and both private and public consumption, should remain the main growth drivers. The biggest risk for the economy is not Trump or political populism in the Eurozone but self-complacency. The economy urgently needs new impetus from new structural reforms and stronger public and private investment. It is very unlikely that it will get any of these before the elections.