EcoPerspectives // 1 quarter 2019  
Economic climate change  
Economic growth has slowed markedly since the second quarter of 2018 and business surveys indicate that it is unlikely to change in  
the coming months. The exporting manufacturing sector is much affected by the slowdown in world trade. In the coming quarters, the  
domestic economy is likely to become the major engine behind growth thanks to an expansionary fiscal policy. More fiscal stimulus  
could be expected if the economy would slow further. This would also shore up the chances of the coalition parties at the next federal  
election set for 2021.  
1- Growth and Inflation  
Slowing down  
GDP Growth (%)  
Inflation (%)  
The business cycle has slowed substantially since the second  
quarter of 2018. Problems in the car industry following the  
introduction of new European emission standard resulted in  
substantial production losses. In addition, the banning of older  
diesel cars from city centres has also been affecting car sales in this  
segment. In November, automotive production was 12% lower from  
a year earlier. However, the problems are not only restricted to the  
car industry. Export demand in general has eased due to a  
slowdown in world trade. Furthermore, private consumption slowed,  
despite favourable developments in the labour market. As a result,  
the household savings rate is trending higher. The exception to the  
bleakness was housing construction, driven by shortages and  
rapidly increasing prices. Overall, Destatis estimates that GDP  
increased by 1.5% in 2018, i.e. a full percentage point less than in  
Source: National accounts, BNP Paribas  
- Increasing bottlenecks in the labour market  
of businesses reporting shortage of manpower  
Manufacturing  Construction  
▪▪Unemployed per vacancy (rhs)  
Despite slowing demand, the unemployment rate has further  
declined to only 3.3% in November, the lowest in the euro area,  
while bottlenecks in the labour market have further increased. In the  
manufacturing sector, about one in four employers report recruiting  
difficulties. In the construction sector, 10% of builders report that it is  
even their main limiting factor. The German economy increasingly  
recruits foreign workers. In the twelve months to October 2018, the  
economy created as many as 700k jobs, of which 54% were  
occupied by foreigners. The German parliament recently adopted an  
immigration law to facilitate access to the labour market for workers  
from outside the EU.  
The favourable economic situation and growing labour shortages  
have resulted in a rise in negotiated pay rates. In the fourth quarter  
of 2018, basic pay was 3.2% higher from a year earlier. In the  
manufacturing sector, hourly earnings increased by 3.5%. These  
pay hikes have not yet resulted in a pick up in inflation.  
Source: IFO, IAB, BNP Paribas  
Room for fiscal easing  
Looking only at the economic results, the actual grand coalition  
between conservatives (CDU/CSU) and social democrats (SPD)  
should be doing quite well. The government finances are in rude  
health. For 2018, the government finances were again in surplus,  
estimated at 2% of GDP. Moreover, public debt declined to around  
Following the disastrous results of the CDU/CSU in state elections  
in October, Chancellor Merkel announced to renounce the  
leadership of her party in December and to step down as chancellor  
at the next election to be in 2021. The CDU elected Annegret  
Kramp-Karrenbauer (AKK) as party chairman. This choice  
confirmed that the CDU wants to remain a broad people’s party.  
The CDU/CSU is currently polling around 31%, slightly lower than at  
last year’s federal election (32.9%).  
60% of GDP, for the first time since 2002.  
Nevertheless, many voters are unhappy with the ruling coalition, as  
can be seen in the polls and the outcomes of several state elections.  
EcoPerspectives // 1 quarter 2019  
The SPD is in a much more difficult position. In the polls, the party  
obtains the support of only 15%, compared with 21% at the federal  
election. Many party members would like the party to quit  
government at a suitable moment in order to rebuild the party from  
the opposition benches.  
- Rising wage tensions  
%, y/y  
Salaries and wages  
Negotiated pay  
The Green Party profits most from the discontent. According to the  
latest polls, it would obtain 19% of the vote, a gain of 10 points  
compared to the 2017 federal elections. In eleven of the sixteen  
States, the Greens are already in the state government, mostly as  
junior partner. The populist right AfD is only doing slightly better  
than at the latest federal election. The next election is for the  
European Parliament in May. In autumn, several state elections will  
be held in the eastern part of the country.  
According to the coalition agreement, fiscal policy should be mildly  
accommodative in the coming years. On the expenditure side,  
income transfers both at the federal level as the regional will be  
increased. This will be partly compensated by lower interest  
payments, as the government continues to borrow at extremely low  
interest rates. On the income side, tax reductions will be  
implemented even though the tax burden is estimated to decline  
only marginally. Pointing at the healthy budgetary situation, CDU  
leader Kramp-Karrenbauer has already called more tax cuts to head  
off an economic slowdown. By contrast, the SPD prefers stepping  
up spending on education, income transfers and digitalisation.  
Finance-Minister Scholz (SPD) remains cautious, warning that the  
era of windfalls in taxes is probably over.  
2010 2011 2012 2013 2014 2015 2016 2017 2018  
Source: Deutsche Bundesbank, Destatis, BNP Paribas  
The lack of skilled workers is also likely to weigh on housing  
investment. Also other factors, such as the decline of the native-  
born German population and the increase in mortgage interest rates  
are likely to weigh on construction.  
The downside risks to our projection are mainly related to the  
international environment, such as the undecipherable US trade  
policy and a possible disorderly Brexit. On the other hand, the  
domestic risks are on the upside; In particular, the healthy fiscal  
position gives the German authority some leeway in implementing a  
more expansive fiscal stance. This might also shore up the chances  
for the ruling coalition at the next federal elections in 2021.  
Subdued growth in 2019-20  
GDP growth is likely to be subdued in the coming quarters. The  
latest survey data is in line with this scenario of continuing  
weakness. The IFO climate index has been declining since  
September. It reached 101 in December, just above the average in  
The activity slowdown is most obvious the manufacturing sector.  
The problems concern the new European exhaust norms are likely  
to be temporary and some catch-up should be expected in the  
coming months. The main problem for the sector is the slow growth  
of world markets. Both in 2019 and 2020, world GDP is projected to  
growth by around 3.3%, 0.5 percentage point lower than in 2017-  
By contrast, domestic demand is likely to remain rather strong  
thanks to the expansionary fiscal policy. This is likely to underpin  
household consumption in the coming quarters. Moreover, because  
of problems in the car sector, household have been delaying their  
car purchases. As a result, the household savings rate reached  
10.7% in 2018, a highest since end 2005. This could give an  
additional boost to spending, in particular in the first half of this year.  
Growth in government investment is likely to outpace GDP growth in  
019-2020, given the spending plans on transport infrastructure,  
childcare facilities and schools. However, administrative bottlenecks,  
the lack of building plots and capacity constraints might limit the  
execution of the programme.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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