.German economy: It is party time

A tight labour market and swelling order books are
boosting the unions’ bargaining power so they are pushing hard for higher
wages, although increases might fall short of expectations among workers and
the ECB tower.

Meanwhile, in Berlin, Groko hopefuls are spending Germany’s
fiscal surpluses, seemingly unconcerned with demographic challenges and the
fact that record-low interest rates and above-potential growth will not last. This
party will probably go on for some time – maybe even a few years. However, the
situation feels increasingly reminiscent of carnival revellers’ popular song “Am
Aschermittwoch ist alles vorbei” (It’s all over on Ash Wednesday).

Germany enjoys a solid start to 2018. Recording growth of 2.2% in 2017 (2016:
1.9%), the German economy expanded for the eighth consecutive year. Private
consumption was supported by strong income and employment growth.
Moreover, the recovery of global trade provided a lift to export demand. This
resulted in rising capacity utilisation and hence higher investment in machinery
and equipment. For the fourth quarter of 2017, we expect GDP growth of 0.5%.
Whilst retail sales were flat on the previous quarter, industrial production was up
sharply despite a negative “bridge day” effect in October.

Thanks to the solid underlying dynamics, Germany has enjoyed a good start to 2018. This is
reflected in industrial order intake, the robust labour market and consumer and
business sentiment indicators.