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German economy beats 2014 growth predictions

The German economy, Europe's biggest, shrugged off global weakness to expand by a solid 1.5 percent in 2014, and could see growth accelerate this year, analysts said on Thursday.

German economy beats 2014 growth predictions
Work at the Porsche factory in Leipzig. Photo: DPA

According to a flash estimate by the federal statistics office Destatis, German gross domestic product (GDP) grew by 1.5 percent last year, beating the government's projection of 1.2 percent and a sharp improvement over the 0.1 percent growth seen in 2013.

The country's finances were also healthy, with the overall public budget showing a surplus equivalent to 0.4 percent of GDP, the statisticians said.

"On the whole, the German economy turned out to be stable … in 2014," they said in a statement.

GDP growth was "above the average of the last 10 years of 1.2 percent," they added.

"Obviously, the German economy turned out to be strong in a difficult global economic environment, benefiting especially from a strong domestic demand," Destatis chief Roderich Egeler told a news conference.

Following a dynamic start to the year and a subsequent period of weakness in the summer, "the economic situation had stabilized towards the end of 2014," Egeler said.

GDP expanded by "around a quarter of a percentage point" in the final three months of the year, said Destatis economist Norbert Raeth.

A more detailed estimate of fourth-quarter GDP data is scheduled to be released in mid-February.

 'Continued strengthening' 

Overall growth was driven by rising exports, increased consumer and public spending and a rebound in investment, the preliminary data showed.

And that could pave the way for increased momentum this year, the government said.

"At the end of last year, the economy returned to a modest recovery. And overall the signals point to a continued strengthening," the economy ministry said

Currently, the government is pencilling in growth of 1.3 percent, but now looks likely to upgrade its forecast.

Economy Minister Sigmar Gabriel is scheduled to reveal his updated projections at the end of the month.

ING DiBa economist Carsten Brzeski said that during the course of last year, the German economy had been hit by geopolitical conflicts.

"However, under the surface … the economic success story continued as unemployment remained low, employment reached a new record high and private consumption turned out to be an important growth driver," Brzeski said.

Berenberg Bank economist Christian Schulz agreed.

"After two years of near-stagnation, German GDP recorded a first sizeable increase as the economy shook off the confidence shock of the 2010-2012 euro crisis," he said.

The robust labour market "remains the key strength. As a result, consumption is increasingly becoming the key pillar of economic growth," he said.

And the country's strong fiscal position, the buoyant labour market, low inflation, the sharp drop in oil prices, the lower euro and the monetary easing by the European Central Bank "provide plenty of reasons to be optimistic," the expert continued.

"We expect the German economy to gradually pick up speed throughout 2015 and reach trend growth rates of around two percent annualized in the second half of the year," he concluded.

Weaker oil prices and weaker euro

Commerzbank economist Jörg Krämer said the drop in oil prices and the euro's weakening against the dollar "are giving the German economy a considerable boost. We see upside risks for our 2015 growth forecast of 1.1 percent.

UniCredit economist Andreas Rees said he was sticking to his forecast of 1.4 percent in 2015 "with the first signs of acceleration already in the first quarter."

But Postbank economist Heinrich Bayer was more cautious.

"The very presentable annual figure is no cause to sit back on our laurels," he said.

"Given the somewhat weak starting point at the start of the year, full-year growth is hardly likely to match last year's. We're pencilling in growth of just 1.0 percent," Bayer concluded.

SEE ALSO: Schäuble gets his balanced budget early

 

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

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With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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