The Full Employment German Economy Continues To Be The Euro Zone’s Economic Engine. But Trade Worries Weigh Heavily On The Government And The Firms

“With its specialization in capital goods, Germany has benefitted from the broad-based global upswing. In the context of high capacity utilization and easy credit, this has promoted strong machinery and equipment investment… Business sentiment remains high notwithstanding a recent decline related to concerns about rising protectionism. Immigration, rising household incomes, and low-interest rates have boosted housing demand and construction. However, the construction sector has now reached capacity constraints, limiting faster growth going forward.” (OECD, May 2018 Projections For The German Economy)

The German Economy has been on a robust growth path ever since the financial crisis ended nearly nine years ago. But much as in the case of the U.S economy, the roughly fully employed German economy is also encountering constraints on future growth. Assuming no major trade interruption, growth is expected to edge down in future years as slower global growth also triggers a slower export expansion out of Germany.

Obviously, low-interest rates and a strong fiscal position has helped the German economy immensely in recent years. As the OECD indicates, the combination of low-interest rates and capacity constraints supports strong residential investment spending as well as business investment.

On a year over year basis, the German economy recently expanded at a 2.3% annual rate as of the first quarter of 2018. Growth is projected to be about 2.3% this year and 2.1% in 2019.

Although Germany is still expected to record very strong current account balances in the near term, nonetheless the current account surplus will likely shrink in future years. In effect, such huge trade surpluses are not sustainable, particularly not in an era of Trump and trade protectionism.

This year Germany’s CA surplus as a % of GDP is projected to climb to 8.3%, though the CA surplus is expected to drop a bit next year to 7.9% of GDP.