BMI View: While weak economic data out of Germany supports our below-consensus real GDP growth forecast for 2012, the collapse in business and consumer confidence has prompted us to revise down our 2013 GDP projection, to 0.8% from 1.3%. We expect growth to recover in the second half of the year, although this will be mainly driven by external rather than domestic demand.
German leading economic indicators have dropped precipitously over recent months, in line with our below-consensus 0.7% real GDP growth estimate for 2012. Yet while we had expected the drop in output, the collapse in business and consumer confidence readings has taken us by surprise, implying the rebound will be more subdued than we had initially expected. We are therefore revising down our 2013 growth forecast from 1.3% to 0.8%, with risks to our forecast weighted to the downside.
Consumer confidence nosedived in H212, according to the DG ECFIN consumer confidence indicator, as weakening labour market conditions crimped households' purchasing power. The impact of weaker spending was best highlighted by the drop in 'big ticket' purchases, with seasonally-adjusted autos sales growth contracting by 4.0% y-o-y in October 2012, the weakest reading since July 2010. The improvement in Germany's IFO business climate survey in December ( see chart), which is highly correlated to consumer confidence, implies that private consumption may have bottomed out in latter stages of 2012, but even if this is the case it would require a massive reversal in sentiment to see significant real household expenditure growth over the next few quarters.
|Weak Start To 2013|
|Germany - Consumer & Business Confidence|
Nevertheless, while the spending habits are clearly suffering from the cyclical slowdown, we do not believe the damage will be lasting, with significant potential for consumers to bounce back as the outlook improves in the latter stages of 2013. Greater clarity over the domestic policy environment following the September general election should help, as should further steps by European leaders towards overcoming the eurozone's existential crisis. Yet for consumption to really take off we would need to see the new government take more aggressive steps towards removing distortive trade policies, which continue to support exports at the expense of domestic consumption.
|Germany - Motor Vehicle Sales, % chg y-o-y|
At present only the opposition Social Democratic Party (SPD) has really taken this view on board, by seeking to make higher wages a key part of its electoral platform. Some members of the governing centre-right Christian Democrats (CDU-CSU) have also talked of the need for a sizeable increase in wages, although the party does not appear willing to risk the ire of business leaders by making this a policy priority. Moreover, even if there is a change in policy beyond the election, this is unlikely to have an immediate impact on spending behaviour, implying the medium-term outlook for household expenditure remains modest. We therefore expect real private consumption growth of just 1.6% in 2014, which will be better than the tepid 0.5% we are projecting for 2013, but not sufficient to indicate a strong domestic demand story.
With the federal government still in consolidation mode we see little chance of a strong contribution from government consumption in 2013, and we are forecasting this component to add just 0.1 percentage point (pp) to the headline 0.8% reading this year. The real question is whether the new government beyond the September election opts to loosen the fiscal taps. While we believe fiscal policy is likely to become somewhat less austere, significant loosening looks unlikely at this stage, hence our view of a similar contribution to GDP from government consumption in 2014.
Gross Fixed Capital Formation
A key factor in determining the pace of GDP growth this year will be fixed investment, which suffered heavily in the latter stages of 2012 as businesses held back investment in light of policy uncertainty at both the domestic and regional level. The impact of policy uncertainty was compounded by weak factory orders from outside of the eurozone in November, implying that already low capacity utilisation levels have fallen further in recent months, reducing the likelihood of a near-term pickup in investment.
|Little Incentive To Invest|
|Germany - Capacity Utilisation, %|
As outlined above, we expect some of the policy uncertainty to clear over the next 12 months, although this is unlikely to have an impact until later in the year. Moreover, any cyclical recovery in business confidence in H213 could be dampened by a slump in external demand, as we expect the current round of Chinese economic stimulus measures to run out of steam over the next few months, hurting Asian and global demand in the process. On balance, therefore, we expect gross fixed capital formation to record a second consecutive year of negative real growth in 2013, at -1.0% following an estimated 2.0% contraction in 2012, with much of the fall to come in the first two quarters.
Exports have been one of the few bright spots for the German economy over the course of 2012, with strong demand from Asia compensating for weaker demand from Europe. With the US economy set to continue its relatively robust recovery over the next 12 months we expect real export growth to continue, but there are clearly sizeable risks to Germany's external picture: the US fiscal cliff, more financial stress in the eurozone periphery and a China hard landing being the main ones. Nevertheless, the weak domestic demand story should mitigate the growth impact of any external weakness, meaning the contribution to growth from net exports should remain positive this year and next, and 0.6pp and 0.5pp respectively.
Risks To Outlook
The need for Germany to play its role in the eurozone's economic rebalancing process by adopting consumption-supportive policies ( see 'Global Rebalancing: A Conflict Ridden Path', October 1, 2012) means that a much stronger domestic demand trajectory is not only possible but desirable, from a regional and global perspective. However, we believe that for at least the first half of 2013 the risks to growth lie mainly to the downside. Uncertainty surrounding the outcome of the Italian elections, scheduled for February, poses the most immediate risk, but the potential for further policy paralysis among eurozone leaders remains a significant downside risk to private sector investment and consumption over the course of the year.
|Notes: e BMI estimates. f BMI forecasts. 1 Pan Germany Unemployment Rate. Sources: 2 Eurostat/BMI; 3 World Bank/UN/BMI; 4 Bundesbank/BMI.|
|Nominal GDP, EURbn 2||2,473.8||2,374.5||2,496.2||2,592.6||2,606.6||e||2,683.2||f||2,786.5||f||2,889.8||f||2,989.3||f||3,090.3||f|
|Nominal GDP, US$bn 2||3,636.49||3,324.30||3,311.12||3,603.71||3,310.38||e||3,354.00||f||3,343.85||f||3,467.80||f||3,587.22||f||3,708.31||f|
|Real GDP growth, % change y-o-y 2||1.1||-5.1||3.7||3.0||0.7||e||0.8||f||1.9||f||1.8||f||1.6||f||1.6||f|
|GDP per capita, US$ 2||44,092||40,341||40,231||43,861||40,375||e||41,000||f||40,966||f||42,565||f||44,097||f||45,641||f|
|Population, mn 3||82.5||82.4||82.3||82.2||e||82.0||e||81.8||f||81.6||f||81.5||f||81.3||f||81.2||f|
|Industrial production index, % y-o-y, ave 2||-7.8||-2.5||14.2||5.0||5.0||e||3.0||f||2.0||f||2.0||f||2.0||f||3.0||f|
|Unemployment, % of labour force, eop 1,4||7.4||7.8||7.1||6.6||7.5||e||7.1||f||6.9||f||7.0||f||7.0||f||7.0||f|