German economy grows at quickest rate in 5 years

Germany’s economy has expanded at its fastest pace in five years, boosting Chancellor Angela Merkel’s re-election hopes and underlining the country’s importance to hopes of a broader eurozone recovery.

German gross domestic product rose 1.9 per cent in 2016 while the country also recorded a third successive year of not needing new government borrowing, with a public sector budget surplus of €6.2bn. The data allow Ms Merkel to continue to boast of a strong economic record as she campaigns for a fourth term in office this year. But the figures could also revive criticism from Germany’s trading partners that it should be more prepared to loosen the purse strings to help weaker eurozone states and rebalance the regional economy.

“There will be more [such] statements from Brussels and other places in the eurozone, and the [International Monetary Fund] . . . They will continue to fall on deaf ears in Berlin,” said Carsten Brzeski, an economist at ING Bank. Acting to head off a domestic debate about using the budget surplus to fund tax cuts or public investments, Wolfgang Schäuble, the finance minister, pledged on Thursday to use it to pay off debt in a message designed to reassure Ms Merkel’s conservative support base. Related article German push for home ownership drives price bubble fears Property becomes ‘concrete gold’ for savers but unease rises at social cost Germany’s growth has been powered by increased employment, rising wages and higher spending linked to the country’s task of absorbing about 1.2m migrants since last year. Unemployment is at a record low and the number of people in work is at its highest since German reunification in 1990. Private consumption rose 2.4 per cent, while public consumption, boosted by refugee expenditure, climbed 4.2 per cent, said Destatis, the government’s statistics agency. Strong domestic consumption played a “critical role”, Dieter Sarreither, head of the agency, said.

Exports, which hit a record in November, were another bright spot, rising 2.5 per cent year on year. Growth is expected to slow this year with economists noting risks to the economy, ranging from protectionist threats from Donald Trump, the US president-elect, to uncertainty over Brexit.

However Jörg Krämer, chief economist at Commerzbank, said: “Rising demand from abroad also suggests a solid plus for Q1 2017 . . . We revise our 2017 forecast for Germany from 1.3 per cent to 1.6 per cent.” Destatis forecasts growth of between 1.1 per cent and 1.7 per cent this year.

The 2016 budget surplus came despite the costs of the country’s biggest refugee surge in two decades. The finance ministry put the overall government surplus, which includes regional and local authorities, at 0.6 per cent of GDP, close to the 0.7 per cent recorded in 2015. 2.5% year-on-year rise in exports, which hit a record in November Officials at the IMF and the European Central Bank have consistently urged Berlin to use its “fiscal space” to boost growth in the rest of the eurozone. Mr Schäuble defended his balanced budget policy, arguing that Germany needs to run a tight ship and take advantage of low interest rates, which are lowering financing costs, to reduce its €1.3tn of public debt Anticipating calls for more public spending, Mr Schäuble said the surplus was “the result of special circumstances, to do with interest costs. That makes it even more important to use these attractive conditions now to make further provisions for the future”. The Social Democrats, Ms Merkel’s coalition partners, want tax cuts and more investments. They fear Germany has gone too far in pursuing fiscal austerity and by demanding it from other eurozone states has boosted populist leaders such as France’s Marine Le Pen.

Sigmar Gabriel, the SPD’s leader, told Spiegel magazine this week: “I once asked the chancellor, what would be more costly for Germany: for France to be allowed to have half a percentage point more deficit, or for Marine Le Pen to become president? She still owes me an answer.”

source: https://www.ft.com/content/8b90a6f6-d8b2-11e6-944b-e7eb37a6aa8e