07 May 2005

EZA 689: Germany vs Euro Area; economic outlook

Converging to the (German) floor or synchronized recovery
During the first half of this year euro area growth started to converge towards that of Germany, narrowing the growth gap from 1.3% to 0.5%. This is mainly related to private consumption, which in Germany showed signs of bottoming – the annual change having been steady at 0.1%. Positive supply effects from labour market reforms and negative demand effects balance each other out. Export growth remained buoyant, contrasting with the see-saw upward trend in equipment investment - pointing to a trade-off between domestic investment and investment abroad. All in all Germany’s weak growth in domestic demand seems to reflect a healthy process of structural adjustment. This should lay the ground for a more sustained recovery – catching up with the euro area - starting at the end of 2005.

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© Graham Bishop