German Economy Zips Along as Trade and Spending Drive Growth

(Bloomberg) -- Germany’s robust economic upswing extended into the fourth quarter, buttressing growth in the euro area as policy makers prepare to wind down stimulus.

Gross domestic product in Europe’s largest economy increased 0.6 percent from the third quarter, the Federal Statistics Office in Wiesbaden said on Wednesday. That’s in line with the median estimate in a Bloomberg survey. The economy expanded 2.9 percent from a year earlier when adjusted for calendar days.

German Economy Zips Along as Trade and Spending Drive Growth

The confirmation of Germany’s vibrant economic vitality comes after the European Commission said the region’s expansion is more balanced than at any time since the financial crisis, and the International Monetary Fund raised its global outlook for 2018. The 19-nation bloc recorded its best performance in a decade in 2017, raising confidence among officials at the European Central Bank that a pickup in inflation will allow them to scale back asset purchases.

“It’s a pretty healthy end of the year,” said Jennifer McKeown, chief European economist at Capital Economics Ltd. in London. “Going into this year, we should see consumer-spending growth pick up and continue to drive the economy.”

Fourth-quarter growth was driven by a strong increase in exports, with total trade making a positive contribution, according to the report. Government consumption and equipment investment increased, while private spending remained largely unchanged and construction slipped.

Eurostat will update its estimate for fourth-quarter growth in the euro area at 11 a.m. in Luxembourg. It reported a 0.6 percent increase in GDP on Jan. 30. The Italian economy expanded a quarterly 0.3 percent in the final three months of 2017, while Dutch GDP increased 0.8 percent.

What Our Economists Say...

“The euro-area’s largest economy finished with a positive output gap of 1% of potential GDP...It’s the only one among the euro-area’s four largest economies to operate above potential. The problem for central bankers is that the advanced situation in the cycle isn’t translating into rising inflationary pressure.”

-- Maxime Sbaihi and Jamie Murray, Bloomberg Economics

For more, see our GERMANY REACT: Momentum Continues Even as Householders Sulk

Consumer-price growth in Germany slowed to 1.4 percent in January, the weakest since May, according to a separate report.

An engine of growth for the currency bloc’s economy in recent years, Germany is benefiting from rising demand for industrial goods from within the country and abroad, as well as healthy consumption underpinned by steadily declining unemployment. 

Deutz, which makes engines for farming and construction vehicles, flagged an almost 20 percent increase in engine demand for 2017, and Siemens AG reported a 14 percent surge in orders in the October-December period.

The Bundesbank said last month that a slightly slower expansion at the end of the year doesn’t impair the “strong and broad-based economic upturn.” 

Backing that claim, business confidence unexpectedly improved in January despite a continuing political impasse in Berlin. Chancellor Angela Merkel’s coalition pact with initially reluctant Social Democrats has yet to be embraced by the party’s base.

Purchasing managers are similarly optimistic. A gauge of private-sector output rose to the highest level in almost seven years at the start of 2018, with factory-gate prices surging at a record pace.

Wage Gains

Metal workers and engineers across Germany won landmark wage deals this month that may see 3.9 million employees getting average annual pay raises of more than 3 percent for the next two years. 

Bundesbank President Jens Weidmann said last week the agreement confirms inflationary pressures will gradually increase as the upswing continues, strengthening his push to rein in unprecedented monetary support in the euro area.

“The German economy is running strong, and the fact that growth slowed somewhat doesn’t really matter much,” Andreas Scheuerle, an economist at Dekabank in Frankfurt, said before the report. “Consumption continues to be a pillar of growth, supported by exports and a pickup in investments. As far as Germany is concerned, all lights are green.”

©2018 Bloomberg L.P.