The Shifting Shape Of Growth

Macro Backdrop

An array of recent data releases reinforce our long-held view that the shape of German GDP is changing ( see 'Stage Set For Stronger Consumption', June 6), albeit at a gradual pace. Slower export growth, a symptom of weaker demand from Asia (particularly China), is being compensated by a strengthening consumer story, although the impact that this shift will have on pace of headline growth is hard to call. At present our 0.5% and 1.9% real growth forecasts for 2013 and 2014 are slightly above Bloomberg consensus estimates, but the divergence in these estimates, which range from 0.5% to 3.2% in 2014, highlight the level of uncertainty surrounding Germany's recovery. Even though we are forecasting stronger private consumption, with exports comprising around 50% of GDP this does not necessarily translate into strong headline growth, and we do not expect real GDP to exceed the 2% mark for the foreseeable future.

Private Consumption: Recent retail sales figures suggest that improving consumer confidence readings are feeding through to consumption patterns, with the month-on-month seasonally adjusted reading up 0.8% in May, and the year-on-year three month moving average measure up 0.3%, the fastest expansion since August 2012. If this correlation between sentiment and consumption continues holds, the next few quarters will see stronger household expenditure, as the GfK consumer sentiment survey hit a six-year high in June, and consumers' propensity to spend remaining high.

Confidence Boost
Germany - House Price Index

Macro Backdrop

An array of recent data releases reinforce our long-held view that the shape of German GDP is changing ( see 'Stage Set For Stronger Consumption', June 6), albeit at a gradual pace. Slower export growth, a symptom of weaker demand from Asia (particularly China), is being compensated by a strengthening consumer story, although the impact that this shift will have on pace of headline growth is hard to call. At present our 0.5% and 1.9% real growth forecasts for 2013 and 2014 are slightly above Bloomberg consensus estimates, but the divergence in these estimates, which range from 0.5% to 3.2% in 2014, highlight the level of uncertainty surrounding Germany's recovery. Even though we are forecasting stronger private consumption, with exports comprising around 50% of GDP this does not necessarily translate into strong headline growth, and we do not expect real GDP to exceed the 2% mark for the foreseeable future.

Private Consumption: Recent retail sales figures suggest that improving consumer confidence readings are feeding through to consumption patterns, with the month-on-month seasonally adjusted reading up 0.8% in May, and the year-on-year three month moving average measure up 0.3%, the fastest expansion since August 2012. If this correlation between sentiment and consumption continues holds, the next few quarters will see stronger household expenditure, as the GfK consumer sentiment survey hit a six-year high in June, and consumers' propensity to spend remaining high.

Confidence Boost
Germany - House Price Index

As we have recently outlined, this improved consumption story is down to both higher wages and the positive wealth effect of rising house prices. The house price impact is likely to have become particularly important following the Q113 spike in prices ( see chart above). Indeed, while banks' consumer loan portfolios have been steadily contracting since August 2012, mortgage credit growth continues to hit post-crisis highs, up 2.4% y-o-y in May 2013. Since we believe higher house prices are a symptom of a structural shift towards higher levels of home ownership, we expect this trend to continue over the next few years, which combined with plummeting propensity to save ( see chart below) will see private consumption increase as a share of GDP and contribution to real GDP growth.

Losing The Will To Save
Germany - GfK Survey Saving Propensity

Government Consumption: As we outlined in our last quarterly GDP update, we see little prospect of government consumption adding much to headline growth over the next few years ( see 'Households To Become Principal Growth Driver', April 5), as any potential increase in fiscal expenditure is likely to be focused on capital rather than current expenditure.

Gross Fixed Capital Formation: Little has changed to alter our relatively muted view of gross fixed capital formation (GFCF) over the next few quarters. While the outlook for real estate remains positive, and IFO Business Climate readings also paint a relatively optimistic picture, capacity utilisation (which is strongly correlated to GFCF) dropped to 81.5% in June from 82.2% the previous month.

Not A Good Sign For Investment
Germany - Capacity Utilisation

This reading is below the 10-year average of 83.4%, and well below the 87-88% level recorded between 2006-08, implying limited incentive for businesses to invest. With the two components of GFCF - 'construction' and 'machinery & equipment' - contracting by 3.6% and 7.6% y-o-y respectively in Q113, it is hard to see capital investment registering positive real growth this year, and forecast GFCF growth of just 0.3% in 2014.

Net Exports: German exports are facing the double whammy of slumping Asian (primarily Chinese) demand, and increased competition from Japan due to massive yen depreciation since the start of the year. As we have been highlighting consistently over the last few quarters, Germany has successfully overcome declining export demand in the eurozone by exporting more to the US and Asia, which has allowed it maintain a sizeable current account surplus and a positive contribution to growth from net exports.

Asia & Americas Taking Up The Slack
Germany - Current Account Balance By Region, EURmn 4 quarter moving average

However, export growth has slowed steadily in recent months, and with imports to rise on the back of strengthening consumption, we believe the contribution to growth from net exports will average just 0.2 percentage points (pp) over the next three years, compared to 1.1pp over the last three.

Risks To Outlook

The risks to our short-term growth forecasts lie primarily to the downside, given the array of challenges facing the eurozone. The main threat, in our view, is one of confidence, as another flare up in sovereign/banking sector crises in periphery states could prompt another collapse in investment, hurting consumer confidence in the process. There is also a threat that German authorities act to clamp down on rising house prices for fear of a speculative bubble (the Bundesbank has outlined its concerns over excessive mortgage growth in recent months), which would also act to dampen consumer confidence.

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Sector: Country Risk
Geography: Germany
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