OECD Economic Outlook May 2019, Country Notes: Germany

138 

Germany GDP growth slowed considerably in 2018 - as world trade lost pace and important export markets decelerated sharply, adding to temporary supply disruptions in the car and chemicals sectors towards the end of the year. GDP is projected to grow at 0.7% in 2019 and 1.2% in 2020. Mounting political uncertainties regarding trade disputes and Brexit are weighing on business confidence. Export growth and business investment are thus expected to slow. Yet, record low unemployment and strong wage growth should continue to buttress private consumption and the construction sector is booming.

Higher spending on pensions, long-term care and child benefits along with reductions in labour taxes will support domestic private demand. Accelerating the disbursal of funds set aside to upgrade digital, transport, energy and childcare infrastructure would strengthen economic growth in the long term, while providing a much needed fillip to aggregate demand now as the external outlook is weakening.

Economic growth has slowed considerably The significant reduction of world trade growth led to a sharp slowdown of activity in Germany’s highly export-oriented economy. This was reinforced by temporary supply disruptions in the automobile and chemicals sectors towards the end of 2018, owing to delays in the certification of new emission standards for cars and a drought. While these temporary factors have now abated, with GDP growth picking up in the first quarter of 2019, the slowdown of world trade, looming trade disputes and Brexit-related uncertainties have led to a sharp deterioration of business confidence. The weakening of the global economy is weighing on demand for investment goods, in which Germany specialises, and new export orders have fallen sharply. Industrial production has slowed down, although less so when one-off factors are excluded.

Germany 1 Export orders have plummeted

Industrial production has slowed markedly Production index, 3-month moving average

Volume, index 2005 = 100 125

Y-o-y % changes 8

Manufacturing Manufacturing without motor vehicles, pharmaceuticals and chemicals

← New export orders excluding large orders, manufacturing

120

7

World trade growth →

115

6

110

5

105

4

100

3

95

2

90

1

85

2013

2014

2015

2016

2017

2018

0

Index 2015 = 100 115

110

105

0

100

2013

2014

2015

2016

2017

2018

95

Source: Statistisches Bundesamt; OECD Economic Outlook 105 database and OECD calculations.

StatLink 2 https://doi.org/10.1787/888933934394

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019

 139

Germany: Demand, output and prices 2015

2016

2017

Current prices EUR billion

Germany GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1

2018

2019

2020

Percentage changes, volume (2010 prices)

3 046.0 1 631.1 587.4 604.1 2 822.6 - 19.6 2 803.0 1 425.3 1 182.3 243.0

2.2 1.9 4.0 3.4 2.6 0.3 2.9 2.1 4.0 -0.5

2.5 2.0 1.6 3.6 2.3 -0.1 2.2 5.3 5.3 0.4

1.5 0.9 1.0 2.7 1.3 0.5 1.9 2.2 3.4 -0.3

0.7 1.1 1.7 2.7 1.6 0.0 1.6 0.9 3.0 -0.8

1.2 1.3 1.4 1.9 1.5 0.0 1.5 2.4 3.3 -0.2

3048.8 _ _

2.2 1.4 0.4

2.2 1.5 1.7

1.4 1.9 1.9

0.7 1.9 1.5

1.6 2.1 1.7

1.0 4.2 9.8 0.9 76.9 68.7 8.4

1.3 3.8 9.9 1.0 72.3 64.5 8.0

1.3 3.4 10.4 1.7 68.2 60.8 7.4

1.4 3.1 10.6 0.9 66.5 59.1 7.3

1.6 2.8 10.5 0.8 64.7 57.3 7.0

Memorandum items GDP without working day adjustments GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2

_ _ _ _ _ _ _

Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 105 database.

StatLink 2 https://doi.org/10.1787/888933935382

Germany 2 Wage growth is picking up

The construction sector is booming Production index

Y-o-y % changes 4.5

Index 2015 = 100 125

Core inflation¹

4.0

Wage rate²

120

3.5

115

3.0

110

2.5

0

0 105

2.0

100

1.5

95

1.0 0.5

2013

2014

2015

2016

2017

2018

2013

2014

2015

2016

2017

2018

90

1. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

2. Average nominal wage per employee.

Source: Statistisches Bundesamt; and OECD Economic Outlook 105 database.

StatLink 2 https://doi.org/10.1787/888933934413

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019

140 ď ź The labour market remains strong, and wage growth accelerated considerably in 2018. This has started to feed slowly into core inflation. Both the quantity and the quality of employment continue to improve, as job growth mainly concerns regular jobs, while the number of low-hour mini jobs subject to limited social contributions and protection is declining. The construction sector continues to boom.

Stepping up public investment would support demand and long-term growth Highly expansionary monetary policy in the euro area and a further loosening of credit standards continue to result in favourable financing conditions, fuelling the housing boom. Higher public spending on pensions, long-term care and child benefits along with some relief for R&D and income taxes will lower the fiscal surplus and support private consumption and investment.

The government budget foresees higher investment in childcare, transport and digital infrastructure, in particular at the regional and municipal levels, as well as additional funds for education, research and innovation. Yet, despite a significant investment backlog, planned spending on infrastructure remains below the 2018 average in other euro area countries relative to GDP. Stepping up investment ambitions would strengthen economic growth in the long term and support domestic demand in the current downturn.

To support effective implementation of planned investment, efforts are needed to bolster planning capacity, in particular at the local government level, and simplify administrative procedures. Plans to simplify and streamline procedures to expand the electricity transmission grid are welcome. This infrastructure is crucial to speed up the transition to cleaner electricity by ensuring that wind energy produced in the north of the country can be transmitted to the south, where industrial activity is concentrated. Similar ambition in other areas would promote a faster upgrade to higher-speed digital infrastructure in rural areas, promoting the adoption of digital technologies, economic growth and regional cohesion. Faster investment in high-quality childcare would promote equal opportunities in education and allow parents to align their working hours with their desires. This would also help to reduce significant gender gaps in career opportunities and wages.

Weaker global trade and capacity constraints will slow economic growth Public and private consumption are projected to support growth, as wages and employment will continue to expand, albeit at a more subdued pace, as significant uncertainty about the external environment is likely to lead to more prudent private-sector wage agreements. Inflation is expected to remain well below 2%. While high capacity utilisation and favourable financing conditions support investment, its growth should slow down due to the weaker global outlook. Capacity constraints and labour shortages are expected to contribute to a slowdown in housing investment. As export growth is weakening, the current account surplus is expected to fall slightly, to 7% of GDP by 2020.

Several external risks could combine to lead to a sharper and more prolonged slowdown of the German economy. These include an intensification of global trade disputes, in particular if this were to involve tariffs on German cars, a sharper slowdown in China than expected or a disruptive Brexit. On the other hand, if domestic demand and imports were to be stronger than projected, the German economy could become the locomotive for faster growth in the euro area. A swift and flexible increase in public spending or steeper labour tax cuts would make such a scenario more likely.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION Š OECD 2019