Economic growth has been modest and business investment is recovering slowly

Export performance has been impressive over the past 10 years, keeping the
share of industry in domestic value-added at an unusually high level of 22%. Exporters
continued to gain substantial market shares in part owing to the depreciation of the euro.

Exports of transport, electronic and optical equipment as well as chemicals, for which
Germany has a longstanding comparative advantage, were particularly strong. Empirical
evidence suggests that decentralised management, with significant worker involvement,
has provided incentives for product improvements, helping exporters to compete on
quality, while offshoring production to low wage countries has reduced costs of
intermediate inputs (Marin et al., 2015). However, weakening growth in emerging
economies has started to weigh on exports.

Demand is therefore shifting from external sources to private households, which are
projected to remain the main driving force for growth in the near-term . Household
consumption will be supported by strong real wage growth, as cheap oil has damped
consumer prices, while a tight labour market and the introduction of the national
minimum wage have pushed up nominal wages.

Demand for housing continues to rise,
pushing up housing rents and prices in urban centres and spurring construction. Loose
monetary conditions and expansionary fiscal policy, in part reflecting government
spending for the needs of newly arrived refugees, provide further stimulus to domestic
demand.

Wage growth has raised unit labour costs somewhat, but price competitiveness
remains strong and inflation is still very low. Mortgage lending to households has
picked up somewhat, while lending to non-financial businesses remains subdued