Wirtschaftswunder Germany logs solid growth, record surplus, foreign envy

Europe’s largest economy defied its own political uncertainty last year, growing at its fastest rate since 2011 and posting a massive budget surplus.
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While Germany is still waiting for a new government, Germany’s economy keeps on booming like nothing has happened. What gives? That was the gist of an invitation sent out to journalists by Germany’s leading industrial association, BDI, for its annual press conference Thursday. They have a point: For an economy notoriously dependent on exports, Germany barely batted an eyelid at the international tumult throughout 2017.

Europe’s largest economy grew by 2.2 percent in 2017, marking the fastest annual growth rate since 2011, according to economic data released Thursday. It looks even better if you adjust for the fewer working days last year: Then the economy expanded 2.5 percent, up from 1.9 percent in 2016. That’s about a full percentage point above what most economists had predicted at the start of 2017 — a year they knew would also bring Donald Trump’s presidency. Economists now expect a similarly high growth rate for this year.

Beyond that, 2017 was a year of breaking records. The German government posted a record budget surplus of €38.4 billion, amounting to 1.2 percent of economic output. Berlin’s fourth straight year in the black is something foreign governments will look at with a mix of envy, because they haven’t achieved it themselves, and anger, because many of them have long demanded that Berlin spend more to rebalance the global economy. At least some of that money is likely to be spent next year.

Employment domestically rose to a record 44.3 million people — 638,000 more than the previous year — with unemployment dipping to 3.7 percent (by international accounting standards), marking the lowest rate since German reunification. The only downside is that employees worked three hours less per week on average. That’s a nod to the rise of part-time work, a sore point in the country.

I wouldn't speak about overheating just yet. Clemens Fuest, president, IFO

Though Germany remains an exporting power, it wasn’t those shipments that drove growth last year. Rather it was consumer spending that was the No. 1 growth driver, according to Andreas Scheuerle of Dekabank. Consumers contributed 1.1 percentage points to growth — about half of the total — and mix of exports, government spending, construction and domestic investment contributed the rest. That marks a departure from previous years, when net export growth typically contributed about half of the country’s overall growth. By contrast, 2017 saw Germany imports grow almost as fast as its exports.

The European Central Bank’s trillions in economic stimulus for the euro zone have no doubt helped, propping up both the economy and the government: Germany’s Bundesbank in a new report seen by Handelsblatt estimated that Berlin has saved nearly €300 billion from low interest rates since 2008. In 2017 alone, interest savings at the federal, state and local level were €50 billion.

That stimulus is the one thing that has some German economists worried that the country’s boom might turn into a bubble. For the moment, though, most economists think that day is still quite far off in the future. "I wouldn't speak about overheating just yet," Clemens Fuest, head of the Munich-based IFO economic institute, told Handelsblatt, noting that wages in Germany aren't rising any faster than productivity.

Peter Bofinger, a member of the government's economic advisory council, added that the country's inflation rate, which averaged 1.8 percent over 2017, was actually too low. "If we want the euro zone to reach an inflation goal of nearly 2 percent, then prices in countries with a strong economy like Germany need to rise more than 2 percent."

What is strange is that most economists will tell you the economy was doing well in 2017 despite stagnation on the political front. Germany has been without a new government since September, and the outgoing grand coalition of Chancellor Angela Merkel's conservatives with the Social Democrats achieved little in the way of economic reforms. For these reasons and more, Dieter Kempf of the BDI called 2018 a “year of action” for the German government — at least once a coalition government is finally put in place.

Christopher Cermak is an editor with Handelsblatt Global based in Berlin. Norbert Häring, Donata Riedel and Klaus Stratmann of Handelsblatt contributed to this piece. To contact the author: [email protected]