Growth curve with pen symbolizes the economic situation; source: iStock.com/blackred

© iStock.com/blackred

  • The German economy is experiencing a robust expansion. In 2017, gross domestic product rose more strongly than in the previous years. GDP registered another respectable development in the fourth quarter.
  • New industrial orders set fresh records in December. Output did shrink slightly in December, but the trend continues to point upwards.
  • Household spending was less dynamic in the fourth quarter than in the previous ones. But the propensity to purchase and retail sentiment remain positive.
  • The high demand for labour in many sectors of the economy is keeping employment figures at record levels and ensuring full employment in some regions. Unemployment and underemployment are continuing their downward trend. Challenges remain, for example in the reduction of long-term unemployment.

GDP expanded by 2.2% in price-adjusted terms in 2017, faster than in the preceding five years. [1] However, cyclical dynamism did drop off slightly at the end of 2017. At 0.6%, GDP in the final quarter of 2017 increased by a little less than in the preceding quarter (+0.7% after a slight adjustment downwards), but nevertheless grew at a respectable rate. [2] A factor behind this is that industrial output in the fourth quarter expanded less strongly than before, and that the construction sector seems to be reaching the limits of its capacity. Growth in the fourth quarter was mainly driven by foreign trade and by investment in equipment. However, the much improved indicators of sentiment and the brisk demand from abroad for German industrial goods suggest that the German economy is starting out well in 2018. In view of the further increase in the level of capacity utilisation in industry, the high level of foreign demand is also likely to stimulate domestic investment in equipment. In view of the good external economic environment, including favourable financing conditions, the solid upswing is likely to continue, based on broad domestic and external economic foundations. However, the shortage of skilled workers is also becoming more visible in some segments of the labour market.

The global economy remains dynamic. According to the latest available figures, in November 2017 global industrial output was 3.3% up, and world trade was 3.8% higher, than a year earlier. The global indicators of sentiment reflect confidence in the world economy. The U.S. tax reform is expected to provide additional momentum for the economy. In the longer term, it remains to be seen whether the reform will also foster growth and how it will affect international competition to attract business and investment. Overall, the dynamic economic development observed in the industrialised countries continued. GDP in both the eurozone and the United States grew by 0.6% in the fourth quarter. Japan saw a rise of 0.6% in the third quarter. Among the emerging economies, China and India are continuing to see strong economic development. Russia and Brazil have left their recessions behind. In view of the higher pace of growth in major economic areas, the global economy is expected to keep accelerating slightly in the course of 2018.

The improved external economic conditions are bolstering German exports. According to balance-of-payments statistics from the Bundesbank, Germany’s exports of goods and services in December 2017 fell slightly by 0.5% in current prices, compared to the preceding month. In the quarterly comparison, which is less susceptible to fluctuations, the rise stretched to 2.6%. Imports also fell slightly in December (-0.2%). But taking the quarterly comparison, the figure for imports also shows an increase, of 2.4%. The cumulative current account surplus in 2017 was slightly lower than that of the previous year. The national indicators on foreign trade and investment suggest that German exports are likely to grow further.

Industrial output fell slightly in December (-0.7%). However, taking the fourth quarter as a whole, the industrial sector registered a solid expansion of 0.9%. At the beginning of the year, new orders picked up considerably (December: +3.8%), reaching a new record level. Capital goods in particular saw a positive development. In the last quarter of 2017, new orders expanded by 4.2%. The brisk demand from the eurozone in particular is resulting in full order books and a good mood in the companies. German industry is likely to make a strong start to 2018.

Consumer spending remains an important pillar of the economy, but the latest indicators continue to suggest that the pace of expansion will slow to some extent. Retail turnover dropped by 1.9% in December, meaning that it was flat in the fourth quarter. In contrast, the number of new registrations of vehicles was considerably higher in year-on-year terms, both in the fourth quarter of 2017 and in January. Overall, sentiment in the retail sector continues to be very upbeat. The ifo business climate index for retailers did soften slightly in January, but remains above its long-term average.

The positive trend on the labour market continued. In the course of 2017, employment rose from each month to the next in seasonally adjusted terms, whilst nearly every month saw a fall in unemployment in seasonally adjusted terms. In December 2017, total employment was up by 67,000 (seasonally adjusted). Jobs subject to social security contributions have seen an even more dynamic development. The leading indicators published by the Federal Employment Agency, ifo Institute, and the Institute for Employment Research all suggest that the continuing high demand for labour is set to continue across many sectors of the economy. The number of unemployed people dropped by 25,000 in January in seasonally adjusted terms, helped to some extent by the mild weather. The unadjusted figure is down below 2.6 million. As more people with a migrant background are entering the labour market, the slight reduction in unemployment predicted by the employment agencies could slow down somewhat in the future. Despite recent positive developments, other challenges that still need to be addressed are long-term unemployment and the fact that joblessness is more prevalent in regions that are structurally weak.

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Note:
A detailed report and commentary on the overall situation and trends in the German economy will be published in the February edition of the monthly report, Schlaglichter der Wirtschaftspolitik (“Economic policy highlights”, in German only). This report is expected to be available on the website of the Federal Ministry for Economic Affairs and Energy in the course of the 10th calendar week of 2018.

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[1] The report is based on statistical data that were available as of 14 February 2018. Unless stated otherwise, these are rates of change against the respective preceding period on the basis of price-adjusted figures which have also been adjusted in line with the Census X-12-ARIMA procedure for calendar-day and seasonal variations.
[2] Preliminary data on GDP development in the fourth quarter of 2017 issued by the Federal Statistical Office on 14 February 2018.