Five-year High Consumption and Construction Boom Spur Germany's Economy

Thanks to a boom in construction and ongoing consumption, Germany's economy has steadily grown during the end of 2016, but rising inflation is likely to dampen Germans' buying mood.
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The German economy continued its steady growth during the end of 2016. In the fourth quarter of last year, the gross domestic product (GDP) grew by 0.4 percent, the Federal Statistics Office said on Tuesday, adding that last year's overall economic situation "was characterized by solid and steady growth."

In the preceding quarter, GDP had grown by 0.1 percent after expansion rates of 0.7 percent in the first quarter and 0.5 percent in the second quarter. This resulted in a 1.9 percent increase for the whole year of 2016, which is the highest growth rate in five years.

Germans' buying mood and government expenditure, including on accommodation for hundreds of thousands of refugees, contributed to the growth, the statistics agency said.

Many consumers are spending their money freely because savings are hardly rewarded with interest rates at record lows. The ongoing real estate boom is also boosting growth. Especially fixed capital formation in construction was markedly up on the third quarter of 2016.

Although Germany’s trade surplus for 2016 rose to €252.9 billion, or $270.5 billion, exceeding the previous high of €244.3 billion in 2015, foreign trade slowed down according to preliminary calculations. Imports rose significantly faster than exports.

Economists are expecting a continuation of growth. Commerzbank's chief economist Jörg Krämer said rising demand from abroad suggests a substantial plus for the first quarter of 2017.

As economists see it, the mainstay of the economy will remain the state's expenditures and consumers' buying mood. However, private spending is unlikely to rise as much as in 2016, according to German market researcher GfK. In January, the Federal Statistics Office announced the German inflation rate had hit the highest level since July 2013, with the cost of goods and services rising 1.9 percent. In December prices rose 1.7 percent year-over-year, while increases were virtually absent in April and May. The higher prices are likely to dampen German's consumer confidence, GfK said.

Daniel Tost is an editor with Handelsblatt Global. To contact the author: [email protected]