Germany builds up new steam for growth

The German economy, after starting the year weakly, looks set to gather momentum later with consumer and business confidence on the rise, data indicated on Friday. Final data published by the federal statistics office Destatis showed that Germany's gross domestic product (GDP) notched up anaemic growth of 0.1 percent from January to March, with only consumer spending in positive territory. While weak, the numbers meant the German economy has successfully skirted a recession following a sharp contraction of 0.7 percent in the previous quarter, since a recession is technically defined as two quarters running of economic contraction. But a breakdown of the figures appeared to offer little cheer, since among the different GDP components only private consumer spending was positive, growing by 0.8 percent. Public-sector spending slipped by 0.1 percent, investment tumbled 2.4 percent, imports were down 2.1 percent and exports contracted by 1.8 percent, the statisticians calculated. Destatis blamed the unexpectedly weak start to the year to the "extreme winter weather conditions." Nevertheless, the government, economic think-tanks and analysts are all convinced the economy will start picking up speed soon. Two new key confidence surveys also published on Friday fed such optimism. German business confidence rose unexpectedly in May, with the Ifo economic institute's closely watched business climate index rising to 105.7 points in May from 104.4 points in April. And on the consumer front, too, German households are not allowing forecasts of a eurozone-wide recession sour their optimism and the GfK institute said its monthly consumer confidence index is forecast to rise to 6.5 points in June from 6.2 points in May. That would be its highest level since September 2007. "Firms are clearly more satisfied with their current business situation than in the previous month. The outlook for future business is unchanged and slightly positive," said Ifo economist Kai Carstensen. "The German economy remains on track in a challenging European environment," he insisted. -- Consumers "Riding to the rescue" -- GfK attributed the robustness of consumer confidence to "the favourable and stable framework conditions in Germany. The high level of employment, favourable wage agreements and slowing inflation are buoying sentiment," it said. "Germany's consumers are riding to the rescue," said Berenberg Bank economist Christian Schulz. "With the euro crisis fading from the headlines, strong fundamentals such as low unemployment, rising wages and low inflation are starting to have their 'normal' effect. And more growth is in store," he said. "In 2013, Germany will have to rely largely on domestic demand for growth," Schulz said. Capital Economics economist Jennifer McKeown said that the renewed rise in the Ifo index and the increase in the GfK barometer "will add to hopes that the economy is recovering." But she believed the Ifo index "has long painted an overly optimistic picture of the German economy." "We still expect only a modest pick-up in German GDP growth, which will not be strong enough to ensure a recovery in the eurozone as a whole," McKeown concluded. "Today's Ifo data really provide a lot of relief," said UniCredit economist Andreas Rees. It was not necessarily the jump in the current business assessment that was most reassuring, but the stabilisation in German companies' business expectations, he said. Taking the Ifo data at face value, "our GDP tracker signals a plus of 0.3-0.4 percent in the third quarter," Rees said. "Indeed, we think that both companies and consumers have a couple of aces in their sleeves which will make the economy running at a decent pace in the further course of 2013," he argued. There would be a rebound in construction activity following the unusually harsh winter weather. And "there are reasons to believe that some of the positive fundamental momentum will carry over into the second half of the year," Rees said. Schulz at Berenberg Bank warned that the outlook for German exports would "likely remain clouded for a while, but as the US economic recovery gathers strength and the eurozone is stabilising, the outlook should be improving for German exporters, too, despite tough competition from Japan." IHS Global Insight economist Timo Klein said he is predicting full-year GDP growth of 0.6 percent in 2013 and 1.5 percent in 2014, warning that the debt crisis "remains a restraining factor due to lingering uncertainty."