19 January 2005

EZA 655: Germany; Economic Outlook vs Eurozone

German catch-up with euro area growth stalls as export engine hit by weaker target markets
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SummarySince our last review Germany's prospects of catching up with the rest of the euro area suffered a setback, as exports — the traditional engine of German recoveries — were hit by combined weakening of key export markets and euro strength. The main culprits of persistent German weakness, however, are domestic sectors — notably construction and private consumption. Despite some signs of a modest pickup in private consumption — in line with tax cuts and increased job creation — as regards relative performance of the German economy the year 2005 is likely to be split into two halves. While in the first half year German growth is likely to under perform, in the second half year there are signs of a catch-up with the growth gap being almost closed by the end of the year. In absolute terms German growth is likely to hover around 1.2% (annual rate in H1 2005), accelerating to close to 2% in H2 2005. In terms of inflation, the German CPI rate is likely to decline in Q2 2005, well before the rest of the euro area to 1.5%. All in all German economic performance is likely to exert downward pressure on euro area interest rates for most of this year. This pressure might abate, only towards the end of 2005, when nominal growth is likely to settle in the 3%-3.5% area. Asset conclusions: re-acceleration of German economy in H2 2005 not fully discounted in stocks, spelling some risks for government bonds at current low yield levels.

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© Graham Bishop