Bright Horizons

Following general elections on 22 September, the Christian Democratic Union get very close to a super-majority its best score in more than 20 years. Nonetheless it lost its traditional ally the FDP which failed to reach the 5%-threshold (4.8%) to remain in the Bundestag. The political negotiations are opened. They could last for several weeks before the formation of a new government is announced. The new government will inherit a healthy economic and financial situation. Even so, it cannot forego in-depth measures to prepare Germany to meet the major challenges of an aging population and the need to strike a new balance between economic growth engines.

A roaring rebound
In Q2 2013, German GDP rebounded strongly after stagnating earlier in the year and contracting 0.5% in Q4 2012. All components of demand contributed to growth with the exception of stocks, which made a slightly negative contribution of 0.1 percentage points. This augurs well for activity in the months ahead.

In Q2, household consumption increased 0.5% q/q (vs. 0.2% in Q1) and made a positive contribution to growth of 0.3 points. The strong increase in new car registrations over the period (+23% q/q) foreshadowed this trend, which should extend into Q3. According to the GfK household survey conducted in August, household intentions to make major purchases reached the highest level since December 2006. At that time, German households had made early purchases in anticipating of a 3-point VAT increase the following January. As a result, household consumption surged 1.6% q/q. This year, with the approach of the elections on 22 September, households also may have made early purchases in Q3, in anticipation of higher taxes if the SPD were to win the elections. Moreover, a housing market rally benefits the home furnishing and renovation sectors, especially energy-saving measures. At the same time, we can see a regular decline in the savings rate since early 2012. In Q2 2013, it dropped to 10%, the lowest rate in ten years. From a more general perspective, the GfK household confidence index for August reached the highest level since September 2007 in a context of virtual price stability. Inflation held at 1.6% in August.

Job market conditions are still favourable. At 6.8% in August, Germany’s unemployment rate is at a 20-year low. This contrasts with the eurozone, where for the sixth consecutive month, the jobless rate is at an all-time high (12.1%) since the series began in 1993. In Q2, employment increased 0.1% q/q compared to the previous quarter, with 52,000 new jobs. The introduction of a minimum wage negotiated by sector (CDU proposal) or at the Federal level (SPD proposal) will help boost disposable income after numerous years of wage discipline. Between 2000 and 2009, real wages contracted at an average annual rate of 0.5%.

BY Caroline NEWHOUSE

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