27 September 2006

EZA 759 Briefing Note

Germany: Economy

Germany: recent income trends: upswing boosts profits, keeps lid on wage share Growth in national income remained at a healthy 2% y/y rate in the 1H06 reflecting healthy underlying growth of the economy – notwithstanding a dip in 2Q06. Going forward growth of profits and capital incomes is likely to halve from over 7% in the last four years to 3.3% – reflecting a cyclical pattern of a late economic upturn. Wage incomes, which had felt the squeeze of falling employment and a negative wage drift in the last four years, continued their recovery with growth in 2Q06 at 0.8% y/y. Wage acceleration is expected to continue, inversely to profit growth, with per capita wages forecast up 2.2% in 2007 by the Ifo institute. But we are slightly less upbeat on the scope for wage rises, given persistent outsourcing pressure. With social taxes at 35% of gross wages – close the 1997 peak – curbing health tax along the lines of the health care reform project remains paramount for labour supply and demand. All in all growth in national incomes bodes well for the sustainability of the current recovery, despite the risk of a marked slowing in GDP growth in 2007.

Asset conclusions: overall healthy state of the German economy bodes well for domestic demand, protecting German assets from adverse international trends

© Graham Bishop