Robust consumption replacing exports as German growth engine

FAN Editor
FILE PHOTO: Steam rises at coking plant at steelworks of ThyssenKrupp AG in Duisburg
FILE PHOTO: Steam rises at a coking plant at the steelworks of German steel maker ThyssenKrupp AG in Bruckhausen, a suburb of the western German city of Duisburg October 2, 2012. REUTERS/Ina Fassbender/File Photo

October 11, 2017

By Joseph Nasr and Michael Nienaber

BERLIN (Reuters) – Robust domestic consumption in Germany will translate into imports outstripping exports this year and next, the economy ministry said on Wednesday, predicting that trade will not contribute to growth.

The ministry said it expects Europe’s largest economy to expand by 2 percent this year, much more than a previous forecast of 1.5 percent and the strongest rate since 2011.

The ministry also raised its growth forecast for next year to 1.9 percent, up from 1.6 percent in April.

The growth forecasts are not adjusted for workdays. A spokesman for the economy ministry said the figures would translate into calendar-adjusted GDP growth rates of 2.2 percent in 2017 and 2.0 percent in 2018.

Trade made no contribution to output growth in 2015 and 2016 as private consumption, state spending and booming construction replaced exports as the main growth drivers.

This shift has been supported by low borrowing costs created by the European Central Bank, which is seeking to restore price stability in the euro zone with a massive bond-buying program and low interest rates.

“Given the dynamic domestic demand, imports will grow somewhat stronger than exports in the years 2017 and 2018,” the ministry said in a statement presenting its updated forecasts.

“As such trade will, on balance, provide in this time frame absolutely no contribution to growth,” it added.

The euro has been strong for much of this year, making German exports outside the euro zone more expensive.

The ministry said consumer prices will rise by 1.8 percent this year and 1.6 percent in 2018, highlighting the uphill battle the ECB faces to nudge up the inflation rate in the single currency bloc to its target of just under 2 percent.

German official are nonetheless concerned by the ECB’s loose monetary policy and have been urging it to roll back the largesse. By contrast, some non-German officials have been seeking more spending by Berlin.

Germany faces weeks of uncertainty as Chancellor Angela Merkel seeks to form a new coalition government after an election last month that weakened her conservative party.

A senior official from the Christian Social Union, Merkel’s main political ally, told Reuters on Tuesday a coalition may not be properly formed until early next year.

Economists say the main risks to the economy come from possible U.S. protectionist policies, Britain’s plan to leave the European Union, and geopolitical conflicts.

(Reporting by Joseph Nasr and Michael Nienaber; Editing and Graphic by Jeremy Gaunt)

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