EZA 813

10 October 2007

GERMANY / EURO AREA GROWTH


Downside risks to growth due to investment and exports


GDP growth in Germany and the euro area likely to slow in a synchronised way, as fiscal tightening is replaced by monetary tightening including a stronger euro.
The shift of income growth from profits to labour implies a strengthening of consumption growth relative to exports and investment in Germany.
The result will be a convergence in demand drivers between Germany and the euro area next year.
The main risk to household consumption may come from politics, if the drive towards minimum wages puts low paid jobs at risk – but this is only likely to impact in 2009.
In terms of the composition of investment spending in Germany we see downside risks to equipment spending and upside risks to construction.

Asset conclusions: slower but steady growth bodes well for stocks in general relative to bonds and for consumption  stocks in particular. The erro is likely to decline from its peak.

© Graham Bishop