This week's burst of survey results show the German economy sustaining its momentum. Unless the wheels come off in the final quarter, Germany will record growth of more than 2% for the year, states Claus Vistesen, chief European economist at Pantheon Macroeconomics.
Although the IHS Markit Flash Germany Composite Output Index was at 56.9 in October, down slightly from September’s 77-month high of 57.7, the Ifo Business Climate Index hit a new record high in September, rising to 116.7 points from 115.3 in September.
While the most recent GfK consumer confidence index also dipped according to the survey results issued on 26 October, German consumers estimate that their economy is continuing to grow.
Optimistic expectations shared
Optimistic economic expectations for Germany are now shared by almost all economic experts, according to market research specialist GfK. It says this is demonstrated by the fact that growth forecasts for gross domestic product must be widely revised sharply upwards.
For example, the German Federal Government's current autumn outlook forecasts that the German economy will grow by two percent this year, after still forecasting a figure of 1.5% in April.
The International Monetary Fund's recently published forecast predicts that Germany will experience economic growth of 2% this year. The forecast was 1.8% as recently as July and just 1.6% in April, observes GfK.
Look to housebuilding
Pantheon's Claus Vistesen identifies the housebuilding sector as a particular source of economic activity. “Unlike some countries, Germany did not have a housing bubble in the pre-2007 economic cycle but we are seeing a big boom in housebuilding there now,” he comments.
This boom is, however, coming off a low base, and the strong German propensity to save remains very much a structural feature of the economy.
“Consumer spending will not be a secular driver of growth, because German consumers, unlike their counterparts elsewhere, will not lever up to buy consumer goods and services,” he observes.
There will be a bloodbath
Like most in his profession, Vistesen cannot simply enjoy a boom. He and his colleagues must instead focus on attempting to quantify when it will end, as of course history shows it must.
What goes up must come down and there will be a bloodbath in housebuilding, where equity reratings have been nothing short of spectacular in recent years.
“We have had a bull market since 2009 and we now seem to have a synchronised global recovery but it is rather long in the tooth now,” he asserts. “It won't die of old age but from an external shock.”
This external shock could take one of two forms, he suggests. One, the US Federal Reserve makes a mistake and raises rates too quickly. Two, China suffers a hard landing.
Given the linkages between China and the eurozone, an economic setback in the former could very quickly hit the latter.
Leaving problems behind
Carsten Brzeski ING's chief economist covering Germany and Austria, issued a brief note in reaction to the Ifo figures. “It seems that German companies have left increased geopolitical tensions, ongoing problems in the German automotive industry and the stronger euro behind,” he said.
“Whether this was the last hooray of the German economy or simply more evidence that German optimism these days is unbreakable remains to be seen. The ifo index has definitely washed away earlier tentative signs that the economy is levelling off.
“For the time being, the German growth party continues as if there was no tomorrow. The outcome of the federal elections has also clearly not shattered business optimism. Over the past one and a half years, the manufacturing sector has staged a remarkable rebound.
“Filled order books and low inventories should keep the manufacturing sector an important growth engine.