The German economy remains susceptible to downside risks

German GDP growth is forecast to slow down in 2012. Crédito y Caución estimates that corporate insolvencies will increase 5% in 2012 and level off in 2013.

Madrid - 22-mai-2012

In the last quarter of 2011 Germanys economic performance lost some momentum, as GDP contracted 0.2% on the previous quarter. This was triggered to a certain extent by the economic problems in the Eurozone, as demand from some EU main trading partners decreased. The only positive contributions came from investments, particularly in construction, while exports decreased 0.3%, according to the German Statistics Office. That said, the German economy still recorded strong 3% economic growth in 2011, after 3.7% in 2010.

The pace of growth is expected to slow down this year, as global demand weakens and the debt crisis in some Eurozone countries persist. However, robust domestic demand will support the German economy. In March 2012 IHS Global Insight estimated that German GDP will grow 0.7% in 2012, followed by 1.6% in 2013.

Private consumption sustained by lower unemployment

Private consumption finally picked up in 2011, contributing more significantly to economic performance than in the years before. It is expected to be a main driver of economic growth in 2012 and 2013, as household consumption growth rates will likely remain robust.

Consumer spending is helped by an overall decreasing trend in unemployment [7.2% in March 2012] and increasing job creation. The jobless rate is expected to decrease further in 2012 and 2013, to 6.8% and 6.6%, respectively. Rising wages also help to fuel improvements in domestic demand. After a decrease in H2 of 2011 consumer confidence has picked up again in Q1 2012.

Rising consumer prices in the last few months have dampened consumer demand somewhat, as inflation increased to 2.3% year-on-year in February 2012, following a 2.1% rise in January. The main drivers were again energy costs [oil, fuel and electricity], which increased 7.6% year-on-year, and motor fuel prices [up 8.9%]. However it is expected that consumer prices will decrease again in the coming months, leading to rising purchasing power of households. After 2.3% in 2011 IHS Global Insight expects inflation to decrease to 1.9% in 2012 and 1.5% in 2013.

Industrial production growth to slow in 2012

Industrial production is expected to increase 0.9% year-on-year in 2012. However, one has to bear in mind that production increases have been rather high in 2010 [10%] and 2011 [8%]. After a weak December 2011 [-2.6%] industrial production increased again in January 2012, by 1.6%. After a decrease in H2 of 2011 business confidence in the manufacturing sector has picked up again since the end of the year.

Will export performance really decrease as much as expected?

According to the German Statistics Office exports and imports increased 11.4% and 13.2% respectively in 2011, and the trade balance surplus rose to Euro 158.1 billion. While Germanys exports to Eurozone neighbours rose 8.4%, those to the US increased 12.4%, to China 20.4% and to Russia a massive 30.6%: more than to any other destination. As in 2010 Germany has profited largely from the surging demand from emerging markets for its specialised goods: industrial machinery, cars, electronics and consumer goods. This export boom has benefited those sectors that had suffered an immense slump during the global credit crisis, such as automotive and metals.

The boom started to slow down in Q4 of 2011, when exports increased only 5.6% year-on-year. Shipments to Eurozone countries even recorded a slowdown of growth to 1.1% in the same period. Despite forecasts of a sharp slowdown in 2012, to date, exports have shown some resilience with robust year-on-year growth rates in January [+9.3%] and February 2012 [+8.6%], as demand from non-EU markets like the US and emerging Asian markets compensated for lower exports to the Eurozone. For 2012 the Federation of German Wholesale, Foreign Trade and Services [BGA] expects exports to increase 6% year-on-year, and imports to rise 7%.

Beside Germanys outstanding export performance, investments in machinery and equipment contributed very strongly to the economic rebound in 2010 and 2011. This is expected to slow in 2012, but to rebound again in 2013.

Reduction of the budget deficit is underway

As a consequence of the credit crisis and stimulus measures, government debt increased sharply to 74.4% of GDP in 2009 and rose further in 2010, to 83.2% of GDP. After a budget deficit increase to 4.3% of GDP in 2010, the Federal Government has reduced the deficit to 1.0% of GDP in 2011. The improved budget balance is largely the result of higher tax revenues and lower government transfer payments for unemployment and short-time working benefits. Germany intends to reduce the government debt over the coming years. 

Downside risks remain

The German economy has proved to be exceptionally resilient. However, even if growth is increasingly driven by domestic demand, the economy is still highly dependent on the performance of Germanys main trading partners. Therefore further escalation of the Euro debt crisis, stagnation of the rather fragile US recovery and a sharp slowdown in Chinese growth remain downside risks which would immediately affect Germanys economy and businesses. Rising inflation fuelled by persistently higher energy prices would hurt consumers´ sentiment and adversely affecting domestic demand.

The insolvency environment

Germanys surprisingly good economic performance in 2010 and 2011 led to fewer business failures. According to the German Statistics Office, the number of corporate insolvencies decreased 5.9% year-on-year - to 30,099 cases after a 2.1% decrease in 2009. Even the relatively high 2009 increase was still much lower than the sharp rise seen in some other European countries such as the Netherlands [73.5%], Spain [50.0%], Italy [28.6%], the United Kingdom [22.8%], Switzerland [23.5%], and France [19.6% in 2008].

The default environment has remained relatively benign so far, but we nevertheless expect that due to decreasing economic growth the insolvency situation will deteriorate somewhat in 2012.

Until mid-2011 the median Expected Default Frequency [EDF] for German listed companies continued its moderating trend, albeit at a slower rate than in 2010. However, since July 2011 the Eurozone debt crisis has led to a deterioration of German EDF levels, although to a much lesser extend than in other large Eurozone economies. In early 2012 the German EDF improved again, with the February 2012 figure [41 basis points] being 10 basis points lower than in December 2011.

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