(Bloomberg) — The outlook for Germany’s economy is improving after two difficult years of near-zero growth. However, a consumer-led recovery challenges the continued weakness of the industry for which there are no quick fixes.
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Data this week showed that a nascent recovery is gaining momentum in Europe’s biggest economy, particularly in service sectors such as tourism and hospitality. The mood among businesses is uplifting as there is growing confidence that the widely expected winter recession has indeed been avoided.
Green shoots are being welcomed across the 20-nation eurozone, even as factories remain in recession. Germany was the main driver of expansion in the eurozone until rising energy costs and shrinking demand from China made it the biggest laggard.
Politics could also benefit, with rising wages, falling inflation and the possibility of imminent interest rate cuts boosting the outlook, helping to dampen the appeal of the far-right party AfD, which has seen a surge in support in recent years.
“Consumers are a little more confident about trends and are willing to spend a little more,” said Anja Heyman, an economist at HSBC. However, the manufacturing industry is still at a disadvantage, and says, “Germany’s strong economic recovery is not very promising, as industry plays a very important role in overall growth.”
The first verdict on first-quarter gross domestic product is due to be delivered by Destatis on Tuesday, with Germany’s Bundesbank recently reversing its earlier call for contraction and now forecasting growth, albeit at a slower pace. Against the backdrop of a decline in production in the previous period, an increase in industrial production and improved performance in the construction industry due to mild winter weather are thought to have boosted the company’s results.
This view is in line with economists surveyed by Bloomberg who estimate a 0.1% rise in GDP. However, the Bloomberg Economics Nowcast still suggests a slight decline.
Bloomberg Economics speaks…
“Recent survey data shows that the German economy is on the road to recovery. A solid reading of the Ifo Business Climate Index in April shows that activity in the quarter was better than expected, mainly due to faster growth in the services sector. is showing.”
―Martin Ademar, economist.Click here to read the full memo
Whatever the outcome, there’s a good chance this quarter will be stronger. GfK said business expectations as measured by the Ifo Institute reached a one-year high in April, while consumer sentiment rose for the third straight month on higher wage expectations.
This new perspective comes as inflation has slowed to 2.3% from a peak of 11.6%. This trend is reflected across the region, with the European Central Bank deciding to cut interest rates for the first time in June after a series of rate hikes.
Companies reporting first-quarter results this week are starting to reflect more positive news. Software maker SAP SE forecast record revenue growth for its cloud business, and Adidas AG raised its profit target.
But the latest S&P Global poll of purchasing managers shows that it is Germany’s large manufacturing sector that is dampening the scale of Germany’s economic recovery, which is now approaching its second year. .
Chemical giant BASF SE will see its profits fall in early 2024, with CEO Martin Brudermuller saying high gas prices and weak external demand prevent him from “confirming a fundamental turnaround” in the industry. .
The mood in the main automobile sector is not so good. Supplier Continental AG fell short of already low expectations, with CEO Nikolai Setzer warning shareholders on Friday of a “sluggish start to the year.”
Some are optimistic that manufacturers will eventually catch up with other sectors of the economy.
Bundesbank President Joachim Nagel said he was hearing that factory orders were “relatively strong,” while Deutsche Bank analysts were bullish that global economic growth would support exports in coming months. The International Monetary Fund recently slightly raised its forecast for global output in 2024 to 3.2%.
Chancellor Olaf Scholz also expressed optimism: “German industry’s contribution to growth, prosperity and employment remains uninterrupted.”
Exports could benefit from strong global trade this year, although manufacturers will take time to realize the benefits of easy monetary policy. Indeed, IFO Chairman Clemens Fuerst is baffled that it is not already happening.
“We see the global economy improving, but it doesn’t seem to be spreading to German manufacturing,” he told Bloomberg TV’s Francine Lacqua. “I don’t see any signs of recovery yet. Hopefully it will happen, but it may take some time.”
Structural concerns are also growing. When Economy Minister Robert Habeck slightly revised up this year’s forecast on Wednesday, he expressed concern about the low long-term GDP forecast. The government currently expects growth to be 0.3%, up from 0.2% previously.
“We must achieve new economic dynamism, strengthen innovation, reduce unnecessary bureaucracy and tackle labor shortages with determination,” Habeck said.
It turned out to be difficult. A recent 3.2 billion euro ($3.4 billion) tax cut package was diluted by lengthy negotiations and was seen by Finance Minister Christian Lindner as only a first step toward faster economic expansion.
In addition, Scholz’s three-party coalition government will need to find around 20 billion euros in savings in next year’s budget to comply with constitutional borrowing limits. But Holger Schmieding, chief economist at Berenberg, said the resulting debate could dampen the economic upswing, but not stop it.
“Unless policy uncertainty worsens, households and businesses are likely to increase spending from recently depressed levels,” he said. “The recovery in business and consumer expectations shows that.”
–With assistance from Ben Sills and Kamil Kowalcze.
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