Photographer: Martin Leissl/Bloomberg

German Economy Gets Head Start in Year of Political Turmoil

Updated on
  • Euro-area’s biggest economy probably grew 1.8 percent in 2016
  • Consumption is driving growth amid record low unemployment

The German economy is getting some wind in its sails just as the waters are about to get rough.

The nation, the first of the world’s biggest developed economies to report on its 2016 performance, probably achieved expansion of 1.8 percent, helped by a pickup toward the end of the year. The German result, forecast by economists surveyed by Bloomberg, would be the fastest since 2011 and top expected euro-area growth of 1.6 percent.

Record-low unemployment and improving business sentiment are a testimony to Germany’s economic strength heading into a potentially tumultuous 2017 that will see challenges from national elections in autumn to risks from Britain’s exit negotiations with the European Union. The country has also benefited from the European Central Bank’s unprecedented monetary stimulus, which President Mario Draghi said last month will be prolonged through at least the end of this year.

“When you look back, it’s clear that the German economy has been driven by public and private expenditure, which has to do with a robust labor market, higher wages and very low inflation,” said Andreas Rees, an economist at UniCredit Bank AG in Frankfurt. “The risks are clearly skewed to the upside for this year.”

While the Federal Statistics Office will only provide figures for the whole of 2016 on Thursday, it usually shares its assessment of the fourth quarter. That estimate is likely to show growth picked up, with economists predicting the rate of expansion doubled to 0.4 percent from the previous three months.

Latest Reports

Reports published so far have painted an upbeat picture, setting the scene for a potential positive surprise, said Andreas Scheuerle, an economist at Dekabank in Frankfurt. The Bundesbank is forecasting Germany’s economy expanded at a “significantly faster pace” in the fourth quarter.

Industrial production rose for a second consecutive month in November, business sentiment jumped to the highest level in almost three years in December and a survey of purchasing managers suggested manufacturing and services expanded the most in five months at the end of the year.

Germany’s VDMA Mechanical Engineering Industry Association said on Wednesday that machinery orders increased an annual 5 percent in November, driven by a jump in demand in euro-area countries. That was the biggest increase since June.

Meanwhile, unemployment has continued to recede, with the jobless rate at its lowest level since the country’s reunification more than a quarter of a century ago. 

That decline is likely to come to a halt as refugees from war-torn countries including Syria and Iraq enter into the labor market. 

Inflation is also on the rise. Consumer prices increased 1.7 percent from a year earlier in December, a rate not observed since mid-2013. With contributions coming primarily from more expensive fuel and food, the surge may weigh on consumer spending.

Growth Momentum

“If you look into 2017, the pattern and the composition of growth will be the same but everything will be a bit less,” said Carsten Brzeski, an economist at ING-DiBa AG in Frankfurt, who argues the economy is currently experiencing a technical rebound rather than the beginning of a new phase of expansion. “There is simply no new momentum.”

General elections in the autumn of this year, which will pit the ruling party of Chancellor Angela Merkel against a strengthening populist movement, are adding to uncertainty.

The euro-area economy has so far demonstrated remarkable resilience in light of looming national votes -- also on the agenda in France, the Netherlands and potentially Italy -- with growth momentum at its strongest in more than 5 1/2 years at the end of last year.  Germany, which calls the 19-nation region its largest export market, stands to benefit from such stalwartness, driven in part by a strengthening recovery in former crisis countries.

“When you take a look at the latest business surveys, it looks as if euro-zone economies have become more synchronized,” said UniCredit’s Rees. “There is a good chance that this decoupling between economies becomes less pronounced and weaker ones begin to catch up further.”

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