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Analysis

Germany leads Europe out of downturn

by Michael Holstein, DZ Bank

Germany leads Europe out of downturn

DZ BANK

In the wake of the massive economic crunch of 2008- 2009, the German economy grew strongly again in 2010. With an upturn of 3.6%, gross domestic product grew faster than at any point since reunification in 1990. Growth in Germany was, without doubt, crucially driven by the swift recovery of the global economy and global trade, but also has been increasingly stimulated by domestic demand. 

We expect that Germany will report growth of 2.5% in 2011, with in particular the trend for domestic demand to improve continuing. Thanks to the favourable labour-market performance and climbing income levels, we expect that private consumer spending should rise just short of two% in 2011, which is notably the most robust growth in the last decade. In EMU, countless consolidation measures such as reductions in expenditure, cuts in public-sector jobs and in part tax increases will spell only weak economic growth of 1.2% in 2011. Owing to intensive budget consolidation, the economic recovery is now very restrained in most EMU member states. driven by the swift recovery of the global economy and global trade, but also has been increasingly stimulated by domestic demand.Last year, hardly any other major industrialised nation achieved stronger growth than that seen in Germany. German GDP actually grew at three times the average for the EMU member states. Even if no official data is yet available for 2010 as a whole for most of the EMU member states, we can assume that the ‘EMU ex Germany’ only posted economic growth of about 1%.

The Chinese economy closed the year with real verve: according to official figures, in the final quarter of the year gross domestic product rose 9.8% on the year, meaning that most recently the gradual economic slowdown in China did not persist. Measured in terms of growth rates in the prior quarter, which we have estimated on the basis of available data, the pace of growth has most recently actually picked up appreciably again. We have therefore raised our growth forecast for the first half of this year and we predict growth for 2011 not of 8.5% but of 9.2%.

For the US in 2011, the picture is now more upbeat thanks to US Congress having passed a tax bill that entails retaining the tax reductions from the Bush era. In the wake of this latest tax package, we have revised our US growth forecast upwards and it now comes to 2.7% for 2011 and 2.8% for 2012, markedly up on our previous predictions. The downside of the new fiscal stimulation is higher budget deficits. In the near future the administration will have to come up with a fiscal exit strategy that will include politically unpopular cuts in public-sector spending. In recent weeks, inflation has risen noticeably in almost all countries, owing to higher food and energy prices. In particular in the emerging markets rising inflation has already forced a more restrictive monetary policy, which will continue.

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