Perspectives

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EcoPerspectives // 4 quarter 2018  
economic-research.bnpparibas.com  
Germany  
GDP slowing to potential  
Growth decelerated sharply in 2018, although remaining about potential. Tensions in the labour market have resulted in generous pay  
deals. Nevertheless, underlying inflation has remained subdued. Despite the mildly expansionary fiscal stance and very easy  
monetary conditions, the pace of economic growth may decelerate further in 2019 due to a worsening external environment. Labour  
market shortages may intensify in particular in the construction sector. The increase in unit labour costs will gradually spill over into  
higher consumer prices. Political tensions may intensify, but the prospect of defeat may be the glue that holds the coalition together.  
1- Growth and inflation  
Weaker output growth in 2018  
GDP Growth (%)  
Inflation (%)  
In 2017 the economy expanded by 2.5%, supported by robust  
domestic demand and strong foreign trade. However, since  
Q4 2017, growth has slowed considerably, although remaining  
slightly above its potential pace. In the first of 2018, GDP increased  
by 2% from a year earlier. Business indicators point to a similar  
growth pace during the rest of the year.  
Forecast  
Forecast  
2.5  
2
.2  
2.1  
1
.9  
1.9  
18  
1
.7  
1
.6  
1.5  
The growth deceleration is in particular noticeable in the  
manufacturing sector. Foreign orders for German capital goods  
have been rapidly falling off on slowing global growth on the back of  
difficulties in emerging markets and growing geopolitical uncertainty.  
On the other hand, activity in the building sector has been  
strengthening due to the easy financial conditions and housing  
shortages. In the services sector, business conditions have hardly  
changed since the beginning of the year.  
0.4  
0
.1  
1
5
16  
17  
18  
19  
15  
16  
17  
19  
Source: National accounts, BNP Paribas  
2
- Sharp fall in capital goods orders from abroad  
As the economy is growing above potential, capacity constraints  
have emerged. Since Q4 2017, the capacity utilisation rate in the  
manufacturing sector is around 88%. The last time, utilisation rates  
were this high was in 2007-08, just before the Great Recession.  
Labour market tensions have also been increasing as the  
unemployment rate stood at only 3.4% in September, a lowest since  
reunification. Employment-related immigration and asylum seekers  
have become increasingly important for filling vacancies. In the year  
to July, employment of foreigners increased by 300k, which is about  
Capital goods orders (2015=100, three-month moving average)  
 Foreign orders ▪▪▪ Domestic orders  
1
1
1
1
1
20  
15  
10  
05  
00  
50% of all newly created jobs. A third of them were non-European  
9
9
8
5
0
5
asylum seekers.  
Tensions in the labour market have resulted in generous pay  
settlements. Thus far in 2018, employees in major sectors such as  
metal-working, electrical engineering, construction and government  
will see their wages go up in annualised terms by more than 3%.  
Moreover, these agreements have been concluded for rather long  
periods, in excess of 27 months. These higher wage rates have not  
yet been translated into higher consumer prices. In September, core  
inflation stood at only 1.2%  
2
015  
2016  
2017  
2018  
Sources: Deutsche Bundesbank and BNP Paribas  
the public debt-to-GDP ratio by about 1.25% of GDP. The package  
could reduce the current account surplus by 0.25 percentage point  
of GDP. Given the usual implementation lags, the bulk of the effect  
is expected in 2019-2021.  
A moderate fiscal stimulus  
The coalition programme for the period 2018-2022 is a carefully  
crafted compromise between the programmes of CDU/CSU and  
SPD. The whole package could cost EUR 90 bn, or 0.7% of GDP  
per annum. The IMF estimates that the budget will have only a  
modest impact on GDP. The cumulative effect after 4 years would  
boost GDP by about 0.5 percentage point over 4 years and increase  
The government has put the emphasis on improving infrastructure.  
Federal investment spending will amount EUR 150 bn for the period  
2019-2022. A particular focus will be placed on road infrastructure,  
education, housing and digital technology. The programme is partly  
financed by the proceeds of the 5G spectrum auctions.  
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EcoPerspectives // 4 quarter 2018  
economic-research.bnpparibas.com  
A second objective is to boost disposable income for low- and  
middle-income families. Child benefits and tax allowances for  
children will be increased, whereas pensions for parents that have  
brought up children will be raised. In addition, child care facilities will  
be improved and all-day schools will be expanded. These measures  
should make it easier for parents to combine work and raising  
children. By making more funds available for active labour market  
policies, the government hopes to reduce long-term unemployment.  
Moreover, grants will be made available for middle-class families  
with children that are buying a home. Finally, towards the end of the  
government term by 2021, the solidarity surcharge will be abolished  
for 90 per cent of all tax-payers.  
3- Immigrant workers ease production bottlenecks  
Immigrant workers as % of total employment  
EU28 ▪▪▪ outside EU28  lack of workers (balance of opinion, rhs)  
7
40  
30  
20  
10  
0
6
5
4
3
The corporate sector is somewhat forgotten in the government plans.  
The sector will certainly profit from the investment in infrastructure  
and digital technology. However, no tax reductions are foreseen.  
Instead the government hopes to agree at least with France and  
some other EU countries on a common corporate tax base and a  
common tax rate.  
2
008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Sources: Eurostat, European Commission, and BNP Paribas  
Unit labour costs are set to rise rapidly due to high collective wage  
agreements and increases in the statutory minimum wage by 4% in  
In spite of the increase in spending, government finances should  
remain in surplus, thanks to the rapid inflow of tax revenues due to  
the favourable economic environment. The government accounts  
should remain in surplus, and the debt-to-GDP ratio should  
gradually decline. In 2019, it is expected to fall to 56%, well below  
the 60% mark of the Maastricht treaty.  
2019 and 1.75% in 2020. These costs will progressively be passed  
on to final users. The GDP deflator is forecast to increase from 1.5%  
in 2017 to more than 2% in 2019. Also the inflation rate excluding  
energy and food is projected to rise gradually from 1.3% in 2017 to  
1.7% in 2019 and could reach 2% in the following year.  
However, the economic successes have not been translated into  
growing support for the coalition between CDU/CSU (Christian  
democrats) and SPD (social democrats). As expected, the coalition  
parties suffered heavy defeat in the state election in Bavaria on 14  
October. Both the Greens and the AfD (popular right), which had  
campaigned on diametrically opposite programmes, strengthened  
their positions. A similar defeat for the coalition parties in expected  
in the Hesse state election (28 October). This could intensify  
pressure on Chancellor Merkel to step down. However, the prospect  
of defeat in early elections might be the glue that holds the coalition  
together.  
Raymond Van der Putten  
raymond.vanderputten@bnpparibas.com  
Growth slowing to potential in 2019  
Despite the mildly expansionary fiscal stance and very easy  
monetary conditions, the pace of economic growth may decelerate  
further to potential due to a worsening external environment.  
Domestic spending is likely to be the main driver behind growth.  
Even though the pace of employment growth is set to ease,  
disposable income growth should remain robust thanks to the  
already concluded high wage settlements. In addition, activity in the  
construction sector continues to be supported by easy financing  
conditions and rising house prices. However, in this sector output  
growth will be held back by the lack of skilled labour. On the other  
hand, the outlook for the manufacturing sector remains uncertain as  
heightened geopolitical tensions make employers reluctant to  
embark on new investment projects. This will certainly affect the  
German manufacturing sector, which is in particular specialised in  
capital goods.  
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