Carsten Brzeski's blog

Germany: Never-ending success story

The German economy continues its strong performance, opening the year with GDP growth of 0.6% QoQ.

The German economic recovery goes into its ninth year and it is still going strong. GDP growth in the first quarter came in at 0.6% QoQ, from 0.4% QoQ in the final quarter of 2016. On the year, the German economy grew by 1.7%. The detailed growth components will only be released towards the end of the month but based on monthly data the economy seems to be firing on all cylinders. Growth was driven by public and private consumption, the construction sector and net exports.

Germany’s economic performance is a never-ending success story. A chart topper on permanent repeat. A strong labour market and higher wages are supporting private consumption, low interest rates are feeding into strong construction activity, the refugee influx has led to higher government consumption and the weak euro is supportive for exports. These fundamentals have been intact for a long while and only seasonal factors or technical corrections have led to quarterly fluctuations. The general success story has not changed. The only missing link to further growth is investment which has remained relatively weak over recent years.

Looking ahead, there is increasing evidence that investment could also pick up in the course of the year. Two months of positive new orders data were a good start, accompanied by bouyant confidence indicators. Also, there are more fundamental factors arguing for a more positive take on the German industry and investments. The combination of strong orders at hand and low inventories is currently as good as in mid-2006 and late-2010. Capacity utilization has, almost unnoticed, increased to the highest level since late 2008. And, according to surveys, companies currently consider equipment as a limiting factor to production as pressing as in the first quarter of 2012, even though labour is still mentioned as the most important limiting factor.

The German economic recovery has entered its ninth year and there are no signs that this recovery could come to an abrupt halt. This performance is even more remarkable, given the absence of any new structural reforms. To transform this chart topper on permanent repeat into a real evergreen, new structural reforms and public and private investments are unavoidable.

Yesterday, German finance minister Schaeuble used the analogy between the German economy and soccer team Real Madrid, suggesting that no one would ask Madrid to become weaker, other clubs had to become better. An analogy, which looks nice at first but is less flattering at second glance. Real Madrid is amongst the European soccer clubs with the highest debt position, pursuing a kind of beggar-thy-neighbor policy and buying players from competitors. A suggestion for future analogies: what about the surprise of the German soccer competition this year? RB Leipzig. An example of how smart investments and reforms with a clear long-term strategy can bring unprecedented success. Within five years, the club just made it from fourth division into the Champions League.