Achi news desk-
Germany’s economic outlook is looking up after two dire years of almost zero growth. However, the consumer-led revival speaks to an ongoing industrial weakness for which there is no quick fix.
(Bloomberg) — Germany’s economic outlook is looking up after two dire years of near-zero growth. However, the consumer-led revival speaks to a continuing industrial weakness for which there is no quick fix.
This week’s data signaled that the new recovery in Europe’s largest economy is gaining momentum – particularly in service sectors such as tourism and hospitality. The mood among businesses is rising as confidence grows that the widely predicted winter recession has, in fact, been averted.
“Consumers are a bit more certain about developments and are happy to spend a bit more,” said Anja Heimann, economist at HSBC. But with manufacturing still on the back foot, “we don’t really expect a strong increase in Germany, because industry has such an important weight in overall growth.”
An initial ruling on first-quarter gross domestic product is expected on Tuesday from Destatis, with the Bundesbank recently reversing an earlier call for contraction to now forecast growth, albeit modest. Following a contraction in output in the previous period, the increase in industrial production and better performance in terms of construction amid the mild winter weather probably boosted the result.
“The German economy is on the road to recovery, according to recent survey data. A stronger reading of the Ifo business climate index in April points to higher-than-expected activity in the current quarter, driven mainly by accelerating growth in the services sector.”
—Martin Ademmer, economist. Click here to read the full note
Whatever the outcome, there’s a good chance this quarter will be stronger. Business expectations measured by the Ifo organization reached a one-year high in April, while consumer sentiment gained for a third month thanks to rising wage expectations, according to GfK.
The renewed belief comes against a backdrop of moderating inflation, which has slowed to 2.3% from a peak of 11.6%. That trend is reflected across the region, prompting the European Central Bank to pencil in a first rate cut for June following its barrage of hikes.
Companies reporting first-quarter results this week began to reflect the better news: Software maker SAP SE is forecasting record revenue growth in its cloud business, while Adidas AG boosted its profit target.
The mood in the flagship car sector is not much better. Supplier Continental AG fell short of already low expectations, and CEO Nikolai Setzer warned shareholders on Friday of a “sluggish start to the year.”
Some are hopeful that manufacturers will eventually catch up with other parts of the economy.
Bundesbank President Joachim Nagel said he was hearing about “relatively robust” factory orders, while Deutsche Bank AG analysts believe global growth will support exports in the coming months. The International Monetary Fund recently raised its projection for world output in 2024 by a touch, to 3.2%.
Chancellor Olaf Scholz has also struck an optimistic tone, saying “the contribution of German industry to growth, prosperity and employment remains unbroken.”
Structural concerns also loom large. Low long-term GDP forecasts worried Economy Minister Robert Habeck when he presented a rare upgrade to this year’s projection on Wednesday. The government now sees growth of 0.3% – up from 0.2% previously.
“We must enable new economic dynamism, strengthen innovation, reduce unnecessary bureaucracy and decisively tackle labor shortages,” said Habeck.
That has been difficult. A recent tax relief package of €3.2 billion ($3.4 billion) was watered down during long negotiations and was seen by Finance Minister Christian Lindner as only a first step towards faster economic expansion.
What’s more, Scholz’s three-party coalition will need to find around €20 billion in savings for next year’s budget to comply with constitutional borrowing limits. But although the ensuing debate could stop the economic progress, it will not stop it, according to Holger Schmieding, chief economist at Berenberg.
“As long as policy uncertainty does not worsen, households and businesses are likely to increase spending from recent lows,” he said. “The rebound in business and consumer expectations points that way.”
—With the help of Ben Sills and Kamil Kowalcze.
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