Economic situation in Germany in March 2011
All signs are go for another year of dynamic economic expansion in Germany. After posting an unusually strong performance in 2010 - when gross domestic product increased at a real rate of 3.6% - the German economy is expected to sustain its upswing in 2011, although at a somewhat less powerful pace. Particularly satisfying is the fact that the domestic economy is increasingly the driving force behind economic growth, together with the ongoing stimuli from foreign trade and investment. The upturn now stands on two solid footholds.
Thanks primarily to the brisk pace of investment and rising consumer spending, domestic demand accounted for roughly two-thirds of Germany's economic growth in 2010. Surveys show that businesses plan to ramp up their investment activity substantially in 2011 as well. In addition, given the fact that capacity utilisation has returned to normal levels, investment is increasingly being targeted toward business expansion. At the same time, companies are planning to boost hir
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ing activity. This will continue to have a positive impact on the labour market, which performed solidly during the winter despite the early and severe onset of cold weather. Sustained employment growth is improving income prospects for private households, and this is a key factor driving the recent rise in consumer confidence. These are good preconditions for giving a further boost to consumer spending.
The further strengthening of domestic growth drivers over the course of 2011 will give even greater balance to overall economic growth in Germany. This is particularly important as the momentum of the global economy continues to normalise. This will cause external economic stimuli to weaken, although the competitive strength of German companies will ensure that foreign trade remains a key growth factor for the German economy. The aftermath of the disastrous events in Japan are expected to have only a limited direct impact on the German economy, given the comparatively minor role that Japan plays in Germany's foreign trade relations.
The goods-producing sector got off to a good start in 2011. Output continues to expand, increasing in January by 1.8% in seasonally adjusted terms [2]. In the construction sector, output surged by 36.3% in January, thereby already making up for the weather-induced slump in December 2010. Industrial output continued to increase, rising slightly by 0.2%. In year-on-year terms, both industrial and construction output well exceed figures for a year ago after adjustment for working day variations. The outlook remains quite favourable for construction and particularly for industry.
In the construction industry, where the boost provided by crisis-related government stimulus programmes is slowing as these programmes are phased out, the weaker underlying level of demand is returning to the fore. However, with capacity utilisation in German industry now at above-average levels, it is possible that rising demand for commercial construction will have an expansive impact on the construction sector. In this connection, business sentiment in the construction industry has brightened markedly in recent months. Trends in industry continue to point clearly toward growth. Building on an already high volume of orders, industrial demand continued to rise solidly in January (+2.9%), thereby reinforcing the upward trend. This helps to explain the prevailing high level of optimism among companies: in February, the ifo Business Climate Index rose to its highest level since reunification, and Markit's Purchasing Managers' Index posted a record high as well.
Based on available indicators, last year's positive trends in consumer spending are likely to continue in 2011. In January, retail sales (excluding motor vehicles) rose, while motor vehicle sales themselves increased in particular. Current trends point clearly upward, especially with regard to motor vehicle sales. The marked increase in the number of vehicle registrations in February indicate that private car purchases are playing a key role in boosting sales trends. The continued brightening of consumer sentiment - which posted a three-year high in March - adds to the overall mood of confidence. In view of the sustained positive trends in employment, the marked increase in consumers' income expectations appears to be well-founded. However, rising oil and food prices could lead to a reduction in purchasing power which might then have a dampening impact on consumer spending.
Trends in German exports are also pointing upward as 2011 gets underway. Despite a slight decline in the most recent reporting period, exports were up by 0.6% in the latest seasonally adjusted three-month comparison [3]. This represents a continuation of the weaker growth levels in exports which have gone hand-in-hand with the normalisation of the pace of global economic growth. Despite pronounced ups and downs in individual months, nominal imports continue to trend upward, increasing by 2.7% in the most recent three-month comparison (seasonally adjusted). However, when the marked rise in import prices due to the higher costs of commodities and energy is taken into account, the actual volume of imports is trending downward. The outlook for foreign trade and investment remains good. Foreign demand for industrial products remains brisk; as a result, the export expectations of industrial companies rose again solidly in February.
Despite the early and severe onset of winter weather, developments on the German labour market are extraordinarily positive. The sustained upswing, together with a somewhat early spring pick-up, gave another noticeable boost to employment in January, as total employment increased by 23,000 in seasonally adjusted terms. The number of jobs requiring social insurance contributions increased sharply in December by 52,000. Moreover, the demand for workers remains brisk. The reduction in unemployment numbers is continuing and even accelerated in February as unemployment fell by 52,000. These positive labour market trends are expected to continue in the coming months.
The pace of inflation has picked up in recent months. For the first time in nearly two and a half years, year-on-year increases in consumer prices exceeded 2%, with prices in February 2.1% higher than a year ago. Higher prices for light fuel oil, fuels and food were the primary factors driving this increase, as rising import and producer prices were shifted to consumers. The core inflation rate - i.e. the rise in consumer prices excluding energy and seasonal foods - remained at 1% in the most recent reporting period.
Note:
A detailed report and commentary on the overall situation and trends in the German economy will be published in the April edition of the monthly report, "Schlaglichter der Wirtschaftspolitik" ("Economic policy highlights", in German only). This report is expected to be available on the website of the Federal Ministry of Economics and Technology in the 12th week of 2011.
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[1] This report is based on statistical data that were available as of 16 March 2011.
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