Economic outlook, Germany

2 July 2010

Please direct inquiries, if any, to:

Tina Winther Frandsen, Senior Macroeconomic Analyst
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45 8989 2550
Tina.winther.frandsen@jyskebank.dk
Summary - Germany
Prospect of fair growth just below 2% this year and in 2011
• Exports will have greater importance as engine for the economy while the fiscal
policy will have an adverse effect as of 2011. We expect that private consumption and investment
will soon begin to pick up.
up
• The inflationary pressure is moderate and interest rates will remain low. We expect the first
moderate hike from the ECB in June 2011.

Fiscal policy turns around and is tightened as of 2011

• The drastic easing of the fiscal and monetary policies helped pull the German economy out of the
deep recession and continued fiscal easing will support the economy throughout 2010.
• However, as of 2011, the situation will be different because the fiscal policy will be tightened to
ensure that the public finances will get back on a sustainable track.
track This will adversely affect both
private consumption and investment. The tightening measures will be moderate in 2011 but will
increase over the next years.

Exports are an important engine for the German economy

• Germany's economy is highly dependent on exports that account for about 40% of GDP. We
expect that for the period ahead, exports will be lifted by a continued improvement of the world
economy and significant depreciation of the euro.

Private consumption and investment will soon pick up

• Investment has fallen sharply but we expect it to turn around very soon. There are, however, only
prospects of moderate rises.
• The Germans who are well-known
well known for being eager to save have pulled the brake seriously and
private consumption is still weak. However, the adverse effect from the labour market has abated.
Wage growth will stay very low, and combined with continued uncertainty and fiscal tightening as
of 2011, this means that we only expect a small increase in private consumption in future.
Fair upturn
p in 2010 and 2011
• After a sharp decline of 4.9% in 2009, we expect GDP growth of
just below 2% in both 2010 and 2011.
• Exports will have greater importance as engine for the economy while the fiscal
policy will have an adverse effect on growth as of 2011. We expect that private
consumption and investment will start to increase slightly as of the second half
of 2010, but growth in private consumption and investment will be a tad slower
than usual.
Business confidence indicators still
signal improvement
• The PMIs are still signaling higher activity both in the manufacturing
industry and in the service sector, but the small declines lately indicate that
the pace will be a bit slower than so far.
Clear improvement in the
manufacturing industry
• We expect that the important manufacturing industry in Germany will
continue to increase although the pace may be a tad slower than in
early 2010.
• New orders have increased substantially and the economic indicators
for the manufacturing industry also suggest that activity will continue to increase.
• The increase in exports is decisive, but also the more dynamic stocks contribute to
the increase in the industrial production.
production
 Exports
p on the increase
• Germany's economy is highly dependent on exports that
account for about 40% of GDP.
• Exports are lifted by the higher activity level around the world and also by the
significant depreciation of the euro.
• We expect that exports will go on increasing, and thus contribute to getting
the Germana economy
o o y going
go g in future.
uu
Marked depreciation of the
currency
Investment will soon begin to
increase
• Investment has declined substantially, and the investment ratio
is therefore very low. Combined with higher capacity utilisation,
this is a signal that investment will soon begin to pick up.
• However, due to the economic prospects, which are still uncertain, and
companies' focus on debt reduction, we only expect a moderate increase in
investment.
 Private consumption is still weak
• Consumers have been through a very hard period, but now it
seems that retail sales are stabilising.
• The adverse effect from the labour market will abate, but wage growth will
stay very low, and combined with continued uncertainty and fiscal tightening
as of 2011, this means that we only expect a small increase in private
consumption for the period ahead.
• In advance, the German consumers are well-known for being eager to save.
Germany: Retailsales (ex. autos and gas) Germany: Savings rate
3 month gliding average Percent of disposible income
101,0 101,0 11,75

100,5 100,5
11,50
100,0 100,0

99,5 99,5 11,25

99,0 99,0
11,00

Percent
Index

98,5 98,5
10,75
98,0 98,0

97,5 97,5 10,50

97,0 97,0
10,25
96,5 96,5

96,0 96,0 10,00

2003 2004 2005 2006 2007 2008 2009 2010 2003 2004 2005 2006 2007 2008 2009

Source: Reuters EcoWin Source: Reuters EcoWin

 Unemployment a pleasant
surprise
• Unemployment has only risen slightly, considering the significant
economic setback. This is, however, to a high degree attributable
to a number of political initiatives, including work-sharing.
• As the various programmes expire, unemployment may increase further.
However, it is good news that employment has started to increase slowly and
that the number of persons on work-sharing programmes declines.

Germany: Unemployment rate Germany: Number of short-time workers decreasing

12,5 1,75 1,75

12 0
12,0
1,50 1,50
11,5

11,0 1,25 1,25

10,5

Million people

Million people
1,00 1,00
Percent

10,0
0,75 0,75
9,5

9,0 0,50 0,50

8,5
0,25 0,25
8,0

7,5 0,00 0,00

02 03 04 05 06 07 08 09 10 00 01 02 03 04 05 06 07 08 09 10

Source: Reuters EcoWin Source: Reuters Ecowin

Moderate inflationary pressure
• Due to the many idle resources in the economy and slow wage
growth, the inflationary pressure is very moderate, although
the depreciation of the currency has the opposite effect.
• We expect inflation to remain moderate in future.
Very low interest rates
• We expect the European central bank, the ECB, to keep
interest rates very low until June 2011. Interest rates will
only be raised moderately.
Disclaimer & Disclosure
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h recommendations
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