German economy on cloud nine; defied the financial market turmoil - ING

Carsten Brzeski, Research Analyst at ING, notes that the German economy grew by 0.7% QoQ in the first quarter of 2016, from 0.3% QoQ in the final quarter of 2015.

Key Quotes

“The strongest quarterly performance since the first quarter of 2014 and stronger growth than the Eurozone’s 0.6% QoQ growth performance. On the year, GDP was up by 1.6% (in working day adjusted terms). The GDP components will only be released at the end of the month but judging from the available monthly data and the statistical agency’s press release, growth in the first quarter was mainly driven by domestic factors. Particularly, activity in the construction sector boomed on the back of the mild winter weather.

The latest recovery of the German economy lasts already for seven quarters. Without the small stagnation in the second quarter of 2014, the economy could now look back at twelve consecutive quarters of economic growth.

Against this background of a long and strong growth performance, it does not really come as a surprise that many German policymakers have become complacent, some even big-headed, or at least not being very open for criticism or proposals to further improve the economic performance. In fact, today’s data provide new ammunition for the proponents of ‘there is no need for change’.

Such an attitude stands in sharp contrast with the latest round of international pressure on Germany to implement some change. After criticism on Germany’s high trade surplus and rather naive recommendations to reduce the deficit, it was then a call to increase domestic wages and investments and has now become a clear disclosure of Germany’s lack of structural reforms.

Today’s data are another sign of Germany’s economic strength. At least at first glance. The economy defied the financial market turmoil at the start of the year as well as the Chinese slowdown. Even if many Germans don’t want to hear it, strong domestic activity is also the result of the ECB’s loose monetary policy.

At second glance, however, the strong growth performance also shows what currently is the biggest risk for the German economy: complacency. Ironically, with growth driven by construction and consumption and a government which is reluctant to follow up on international advice to implement structural reforms, the German economy has almost started to resemble peripheral characteristics.”