German chancellor Angela Merkel has taken nearly five months to assemble a new ruling coalition since last September’s election setback. That hasn’t impeded the country’s strong economic recovery from the global financial crisis of 10 years ago.
Germany’s growth is powering ahead. In 2017 the economy expanded by 2.2%, the best rate for six years. Unemployment is at record low levels and a government budget surplus in 2016 of €23.7bn – 1.2% of GDP – was the biggest since German unification at the end of the 1980s.
This week’s factory orders data for December easily surpassed forecasts, despite the euro’s recent recovery against the dollar and other currencies. They rose by 3.8%, way above the expected 0.7%, while engineering orders surged by 7% from a year earlier.
Industrial output eased by -0.6% in December, but the dip was expected after a solid 3.1% increase the previous month.
Benefits of QE

Nearly three years after the European Central Bank launched quantitative easing – and two years since it cut its benchmark interest rate to zero – even the eurozone’s weakest economies have moved out of recession.
However, unlike the region’s so-called PIIGS – Portugal, Italy, Ireland, Greece and Spain – Germany’s economy didn’t really need the emergency stimulus that has rescued its weaker neighbours.
There was a short-lived slump in 2008-09 and some weak quarters as recently as 2014, but Europe’s largest economy was helped by a sickly euro that helped Germany’s major manufacturers and exporters stay relatively buoyant.
With the economy into its ninth consecutive year of expansion, Germany’s government has already raised its growth forecast for 2018 from 1.9% to 2.4%. Recent surveys of business confidence and consumer morale show that optimism is high across the board.
Restless unions

With the economy firing on all cylinders, the powerful IG Metall labour union has felt able to flex its muscles once again. Industrial workers and employers have been in talks over recent weeks on demands for improved pay and working hours that last month triggered a series of 24-hour strikes at companies from BMW and Bosch to Daimler.
More industrial action was on the cards before this week. However, a wage deal finally hammered out on Tuesday will see 3.9 million metal and engineering workers get a 4.3% pay rise from April and other payments spread over the next 27 months.
As IG Metall negotiator Roman Zitzelsberger noted: “Workers will have more money in their pockets in real terms; they will get a fair share of company profits and that will boost consumption.”
Not that consumers weren’t already bullish – workers are feeling more secure about their jobs, while rising real wages and the low cost of borrowing has helped household spending keep the good times rolling.
Fear of overheating

The Financial Times notes that Germany’s economy has now surpassed its potential growth rate of about 1.5% — the rate it can expand without stoking inflationary pressures — for four successive years, while the manufacturing sector’s capacity utilisation is at its highest level since mid-2008.
The FT also reports that with their order books full, some German companies have stopped taking on any new customers.
At the same time, the number of Germans in employment is forecast to rise nearly 500,000 this year to a record 44.8 million, trimming the jobless rate from 5.7% to 5.3%. However, for businesses this also means that skilled workers are increasingly hard to find – hence IG Metall’s efforts to wring concessions from employers.
In common with their peers in other eurozone economies, German companies must also contend with the euro’s advance against the dollar as well as rising oil prices. Stronger growth also shortens the odds of the ECB moving to normalise monetary policy earlier than previously expected, by turning off the QE tap and allowing interest rates to rise.
A lid on inflation

The good news is that German inflation is still subdued. Indeed, the rate eased back to 1.4% last month from 1.6% in December against expectations that it would edge higher and is still comfortably below the ECB’s 2% target rate.
What can the government do to ensure the lid stays on, without also stifling growth?
Economic research centre The Kiel Institute has recommended that Germany’s government puts its budget surplus to work. It recommends reducing corporation tax to attract foreign investment as the most effective method – particularly since president Trump won approval late last year for big US corporate tax cuts.
Foreign investment would also be attracted by more enticing rates on German government bonds as the returns have been notoriously meagre in recent years.
However, an option likely to gain wider support is to devote more spending on infrastructure. Many of Germany’s roads and bridges date back to the industrial boom of the 1960s and 1970s and are increasingly unable to meet the demands of modern traffic.
Analysts also suggest that if Germany’s inflation rate edges a few notches higher in order to keep growth robust, it’s probably a modest price to pay.