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Germany Goes From Sick Man to Robust on Domestic Demand - Businessweek
Germany's economic expansion is increasingly home-grown.
Unemployment at a two-decade low, wages accelerating out of years of restraint and falling borrowing costs are spurring consumers in Europe's linchpin economy to spend more. Showcased by rising property prices, that's at odds with the rest of the euro area, where austerity and the bursting of debt-fueled asset bubbles are forcing households to cut back.
Economists from HSBC Holdings Plc to BNP Paribas SA are responding by raising forecasts for German growth and declaring that domestic demand is emerging as a rival to exports as the economy's driver. The rejuvenation may help strengthen and rebalance the rest of the euro area, even as it makes it tougher for the European Central Bank to set a one-size-fits-all monetary policy.
"Ten years ago, Germany was the 'sick man of Europe,'" said Holger Schmieding, London-based chief economist at Berenberg Bank, Germany's oldest bank. Now, "Germany will enjoy a golden decade of more growth and employment with a healthy fiscal balance."
Consumer spending could grow more than 2 percent next year, eclipsing the annual average of just 0.75 percent since 1999, according to David Owen, chief European financial economist at Jefferies International Ltd. in London. Export growth averaged about 2.25 percent a year and economic expansion 1.35 percent since 1999, he estimates.
Upside Surprise
"When discussing prospects for Germany, the focus often revolves around the outlook for exports," Owen said. "However, there is certainly scope for German domestic demand to surprise on the upside."
The improved domestic outlook is one reason Berenberg Bank sees a "good chance" the DAX Index (DAX) of stocks will top 7,200 this year, a 22 percent gain since Dec. 31. The DAXK Index (DAXK), a German equities gauge that strips out gains from dividends, has jumped 11 percent compared with an 8 percent rise for the Standard & Poor's 500 Index.
Profit at Douglas Holding AG (DOU), Europe's largest retailer of makeup and perfumes, rose 14 percent last year, with the Hagen- based company's Chief Executive Officer Henning Kreke calling sales in its domestic market "particularly satisfactory." Revenue in Germany increased 5 percent to 990.4 million euros ($1.3 billion), while sales abroad fell by a similar margin to 888.2 million euros
Rising Clothing Sales
Gerry Weber International AG (GWI1), the Halle-based maker of women's clothing, plans to open as many as 85 new company- managed stores, about half of them in Germany, after sales rose 13 percent last year to 702.7 million euros. Germany accounted for 60 percent of the sales total.
Challenges still remain after the economy contracted 0.2 percent (GRGDPPGQ) in the fourth quarter. A more than 30 percent jump in the price of oil since Oct. 4, 2011, threatens to sap purchasing power and was cited by economists as a reason why retail sales unexpectedly fell for a second month in February.
Factory orders increased less than forecast in February, while industrial output fell more than economists predicted, data showed this month. Budget-induced pain elsewhere in Europe also could undercut export demand, and the debt crisis risks reigniting.
A rallying German economy may further complicate the ECB's ability to set uniform monetary policy as it aims to keep inflation just below 2 percent, said Alexander Koch, an economist at UniCredit Group in Munich.
'Create Risks'
The inflation rate in Germany was 2.3 percent in March, compared with 1.4 percent in recession-hit Greece. With the euro-area rate at 2.6 percent last month, Bundesbank President Jens Weidmann already has warned that the ECB won't hesitate to raise interest rates if needed to contain price pressures.
The central bank has cut its benchmark rate to a record low 1 percent and expanded its balance sheet by about 30 percent since President Mario Draghi took office in November, injecting more than 1 trillion euros into the banking system.
While Draghi said on April 4 that talk of withdrawing the liquidity measures is premature, he also said the central bank has the tools required to tackle upside inflation risks in a "firm and timely manner."
Germany would "probably require higher interest rates if you look at it on a unitary basis," Koch said.
Real Estate Revival
One sign things may be changing for good in Germany is a real estate revival in an economy where owner occupation is only about 45 percent. The Bundesbank estimates the average price for homes in 125 German cities jumped 5.5 percent last year, the most since the country's post-reunification boom of the early 1990s, and more than double 2010's 2.5 percent advance. Prices in Spain dropped 11.2 percent.
While the pace may ease, Berlin-based consulting company BulwienGesa AG predicts average re-sale price for apartments will rise about 4 percent through 2016 in the capital city, 4.8 percent in Munich and 3.5 percent in Frankfurt. Cheap mortgage rates, low unemployment, increased urbanization and the need to protect against inflation will drive prices up further, Martin Lueck, an economist at UBS AG, said in a report today.
"Prices will go up more for some time before they peak," Lueck said. "There is little reason to believe the bubble will burst within the next two years."
Domestic spending will provide the economy's main source of growth for the next two years as gross domestic product expands 1.2 percent in 2012, predicts BNP Paribas economist Evelyn Herrmann. HSBC economists Stefan Schilbe and Rainer Sartoris project 0.8 percent growth, as a 0.9 percent increase in household consumption helps outweigh the fallout from the debt crisis. The German economy expanded 3 percent last year.
Improving Domestic Demand
Declining unemployment and rising wages are helping to fuel the improvement in domestic demand, as is investment, which is nearing the pre-crisis level, Dirk Schumacher, an economist at Goldman Sachs Group Inc. in Frankfurt, said in a March 1 report.
The jobless rate fell in March to 6.7 percent, a two-decade low, compared with a 14-year high of 10.8 percent across the 17- nation euro area in February. Heavy-machinery maker Liebherr- International Deutschland GmbH (LIEB) may create 1,200 new positions in the eastern state of Mecklenburg-Western Pomerania as it boosts crane sales to Russia and Brazil, Managing Director Thomas Mueller said Feb. 27.
Other companies may follow, with German businesses potentially adding as many as 250,000 jobs this year, including 80,000 in health and social services, 50,000 in information technology and 40,000 in engineering, the DIHK national industry and trade chambers group said in February, citing a survey.
The resulting labor shortage is pushing up wages after a decade when wage restraint and rising taxes depressed consumer spending, even as consumption grew 15 percent in the rest of the euro area, Schumacher said.
Higher Wages
Germany's 2 million public-service workers may get 6.3 percent higher pay by the end of next year under an agreement with the government, Ver.di labor union said March 31. IG Metall, whose 3.6 million members make it the biggest union in Europe, is demanding 6.5 percent more. That compares with an average 2 percent yearly gain in nominal gross wages from 2000 to 2009, less than half Spain's 4.7 percent.
That leaves Schumacher estimating wages will grow at an annualized rate of as much as 4 percent, supporting inflation- adjusted income growth of about 2 percent and a similar gain in household spending.
While the outlook "would not qualify as a consumption boom, it would imply a markedly larger contribution than seen in the past," he said.
Consumers also may get a lift from easier borrowing costs. The average rate German banks charged on new-home loans fell to 3.5 percent in January from 4.81 percent before the credit crisis began in 2007, according to the Bundesbank.
Avoid Budget Cuts
Unlike elsewhere in Europe, Chancellor Angela Merkel's government can avoid deep budget cuts. While Germany and Italy each will run fiscal deficits of 0.8 percent of GDP in 2013, Germany's will be declining from 1 percent this year and last, while Italy's will be axed from 4 percent in 2011, economists at Deutsche Bank AG estimate.
The revival of the consumer nevertheless draws concern from some quarters. Fearful of asset bubbles, the Bundesbank said in its study of property prices that while "the potential for sudden price reversals still appears limited," the "risk has to be monitored."
It noted that long-term demand for residences faces demographic challenges: Germany's fastest-declining population group, according to research by UniCredit, is between 25 and 44 years old -- the age range typically most likely to establish a household.
Encourage Shopping
More demand from Germany still may help even-out Europe's economy, said William White, a former chief economist at the Bank for International Settlements. Germany's previous reluctance to spend and its reliance on exports for growth sparked criticism it should do more to ease the crisis by encouraging consumers to hit the shops, helping neighbors reduce their trade deficits and offsetting austerity.
The International Monetary Fund estimates Germany ran a current-account surplus of 5 percent of GDP last year, compared with a shortfall of 8 percent in Greece.
"Anything that will get the Germans to spend more money at home, and therefore reduce the external surplus, is a good thing," said White, who now advises the Paris-based Organization for Economic Cooperation and Development.
Germany's economic expansion is increasingly home-grown.
Unemployment at a two-decade low, wages accelerating out of years of restraint and falling borrowing costs are spurring consumers in Europe's linchpin economy to spend more. Showcased by rising property prices, that's at odds with the rest of the euro area, where austerity and the bursting of debt-fueled asset bubbles are forcing households to cut back.
Economists from HSBC Holdings Plc to BNP Paribas SA are responding by raising forecasts for German growth and declaring that domestic demand is emerging as a rival to exports as the economy's driver. The rejuvenation may help strengthen and rebalance the rest of the euro area, even as it makes it tougher for the European Central Bank to set a one-size-fits-all monetary policy.
"Ten years ago, Germany was the 'sick man of Europe,'" said Holger Schmieding, London-based chief economist at Berenberg Bank, Germany's oldest bank. Now, "Germany will enjoy a golden decade of more growth and employment with a healthy fiscal balance."
Consumer spending could grow more than 2 percent next year, eclipsing the annual average of just 0.75 percent since 1999, according to David Owen, chief European financial economist at Jefferies International Ltd. in London. Export growth averaged about 2.25 percent a year and economic expansion 1.35 percent since 1999, he estimates.
Upside Surprise
"When discussing prospects for Germany, the focus often revolves around the outlook for exports," Owen said. "However, there is certainly scope for German domestic demand to surprise on the upside."
The improved domestic outlook is one reason Berenberg Bank sees a "good chance" the DAX Index (DAX) of stocks will top 7,200 this year, a 22 percent gain since Dec. 31. The DAXK Index (DAXK), a German equities gauge that strips out gains from dividends, has jumped 11 percent compared with an 8 percent rise for the Standard & Poor's 500 Index.
Profit at Douglas Holding AG (DOU), Europe's largest retailer of makeup and perfumes, rose 14 percent last year, with the Hagen- based company's Chief Executive Officer Henning Kreke calling sales in its domestic market "particularly satisfactory." Revenue in Germany increased 5 percent to 990.4 million euros ($1.3 billion), while sales abroad fell by a similar margin to 888.2 million euros
Rising Clothing Sales
Gerry Weber International AG (GWI1), the Halle-based maker of women's clothing, plans to open as many as 85 new company- managed stores, about half of them in Germany, after sales rose 13 percent last year to 702.7 million euros. Germany accounted for 60 percent of the sales total.
Challenges still remain after the economy contracted 0.2 percent (GRGDPPGQ) in the fourth quarter. A more than 30 percent jump in the price of oil since Oct. 4, 2011, threatens to sap purchasing power and was cited by economists as a reason why retail sales unexpectedly fell for a second month in February.
Factory orders increased less than forecast in February, while industrial output fell more than economists predicted, data showed this month. Budget-induced pain elsewhere in Europe also could undercut export demand, and the debt crisis risks reigniting.
A rallying German economy may further complicate the ECB's ability to set uniform monetary policy as it aims to keep inflation just below 2 percent, said Alexander Koch, an economist at UniCredit Group in Munich.
'Create Risks'
The inflation rate in Germany was 2.3 percent in March, compared with 1.4 percent in recession-hit Greece. With the euro-area rate at 2.6 percent last month, Bundesbank President Jens Weidmann already has warned that the ECB won't hesitate to raise interest rates if needed to contain price pressures.
The central bank has cut its benchmark rate to a record low 1 percent and expanded its balance sheet by about 30 percent since President Mario Draghi took office in November, injecting more than 1 trillion euros into the banking system.
While Draghi said on April 4 that talk of withdrawing the liquidity measures is premature, he also said the central bank has the tools required to tackle upside inflation risks in a "firm and timely manner."
Germany would "probably require higher interest rates if you look at it on a unitary basis," Koch said.
Real Estate Revival
One sign things may be changing for good in Germany is a real estate revival in an economy where owner occupation is only about 45 percent. The Bundesbank estimates the average price for homes in 125 German cities jumped 5.5 percent last year, the most since the country's post-reunification boom of the early 1990s, and more than double 2010's 2.5 percent advance. Prices in Spain dropped 11.2 percent.
While the pace may ease, Berlin-based consulting company BulwienGesa AG predicts average re-sale price for apartments will rise about 4 percent through 2016 in the capital city, 4.8 percent in Munich and 3.5 percent in Frankfurt. Cheap mortgage rates, low unemployment, increased urbanization and the need to protect against inflation will drive prices up further, Martin Lueck, an economist at UBS AG, said in a report today.
"Prices will go up more for some time before they peak," Lueck said. "There is little reason to believe the bubble will burst within the next two years."
Domestic spending will provide the economy's main source of growth for the next two years as gross domestic product expands 1.2 percent in 2012, predicts BNP Paribas economist Evelyn Herrmann. HSBC economists Stefan Schilbe and Rainer Sartoris project 0.8 percent growth, as a 0.9 percent increase in household consumption helps outweigh the fallout from the debt crisis. The German economy expanded 3 percent last year.
Improving Domestic Demand
Declining unemployment and rising wages are helping to fuel the improvement in domestic demand, as is investment, which is nearing the pre-crisis level, Dirk Schumacher, an economist at Goldman Sachs Group Inc. in Frankfurt, said in a March 1 report.
The jobless rate fell in March to 6.7 percent, a two-decade low, compared with a 14-year high of 10.8 percent across the 17- nation euro area in February. Heavy-machinery maker Liebherr- International Deutschland GmbH (LIEB) may create 1,200 new positions in the eastern state of Mecklenburg-Western Pomerania as it boosts crane sales to Russia and Brazil, Managing Director Thomas Mueller said Feb. 27.
Other companies may follow, with German businesses potentially adding as many as 250,000 jobs this year, including 80,000 in health and social services, 50,000 in information technology and 40,000 in engineering, the DIHK national industry and trade chambers group said in February, citing a survey.
The resulting labor shortage is pushing up wages after a decade when wage restraint and rising taxes depressed consumer spending, even as consumption grew 15 percent in the rest of the euro area, Schumacher said.
Higher Wages
Germany's 2 million public-service workers may get 6.3 percent higher pay by the end of next year under an agreement with the government, Ver.di labor union said March 31. IG Metall, whose 3.6 million members make it the biggest union in Europe, is demanding 6.5 percent more. That compares with an average 2 percent yearly gain in nominal gross wages from 2000 to 2009, less than half Spain's 4.7 percent.
That leaves Schumacher estimating wages will grow at an annualized rate of as much as 4 percent, supporting inflation- adjusted income growth of about 2 percent and a similar gain in household spending.
While the outlook "would not qualify as a consumption boom, it would imply a markedly larger contribution than seen in the past," he said.
Consumers also may get a lift from easier borrowing costs. The average rate German banks charged on new-home loans fell to 3.5 percent in January from 4.81 percent before the credit crisis began in 2007, according to the Bundesbank.
Avoid Budget Cuts
Unlike elsewhere in Europe, Chancellor Angela Merkel's government can avoid deep budget cuts. While Germany and Italy each will run fiscal deficits of 0.8 percent of GDP in 2013, Germany's will be declining from 1 percent this year and last, while Italy's will be axed from 4 percent in 2011, economists at Deutsche Bank AG estimate.
The revival of the consumer nevertheless draws concern from some quarters. Fearful of asset bubbles, the Bundesbank said in its study of property prices that while "the potential for sudden price reversals still appears limited," the "risk has to be monitored."
It noted that long-term demand for residences faces demographic challenges: Germany's fastest-declining population group, according to research by UniCredit, is between 25 and 44 years old -- the age range typically most likely to establish a household.
Encourage Shopping
More demand from Germany still may help even-out Europe's economy, said William White, a former chief economist at the Bank for International Settlements. Germany's previous reluctance to spend and its reliance on exports for growth sparked criticism it should do more to ease the crisis by encouraging consumers to hit the shops, helping neighbors reduce their trade deficits and offsetting austerity.
The International Monetary Fund estimates Germany ran a current-account surplus of 5 percent of GDP last year, compared with a shortfall of 8 percent in Greece.
"Anything that will get the Germans to spend more money at home, and therefore reduce the external surplus, is a good thing," said White, who now advises the Paris-based Organization for Economic Cooperation and Development.
