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Following a strong increase in manufacturing output in Q1 2016, we have raised our forecast for the entire year 2016 to 1% (previously, a marginal increase). Hardly anything has changed in our forecast of generally moderate performance in the manufacturing sector for 2016 as a whole. However, the strong start to the year requires upward adjustments to our forecasts, also at sector level. These are particularly noticeable in the automotive and plastics industries as well as among producers of building materials.
CSU leader Seehofer and SPD leader Gabriel have advocated a stabilization of the level of the public pension scheme’s benefits. This would mean to skip one of the past decade’s major social policy reforms that aimed at enhancing the public budgets' fiscal sustainability. Mr. Seehofer has even questioned the complete architecture of Germany’s pension system by also stating that the Riester-Pension had failed. Obviously both party leaders are in search for popular topics for the imminent federal election campaign, given that in 2017 more than one third of the eligible voters will be 60 years old or older. But it is doubtful whether the promotion of pensioners‘ interests will help both leaders to improve their parties’ image. Further topics in this issue: High returns on direct investments in Germany, Global trade growth remains subdued.
According to our and consensus expectations Germany will record 4 years (2014-2017) of above potential GDP growth in an extremely narrow range of 1.5% to 1.7%, despite substantial shocks and massive swings in growth drivers. If growth breaks out, a downside move seems more likely than higher growth. The economic slowdown in the oil-producing countries due to the falling oil price also carries implications for the German economy in terms of its foreign trade. Although the overall effect is positive for the German economy, German exports to oil-producing countries remain under pressure. Capital spending on residential construction has been growing sluggishly in recent years. The main reasons are: a shortage of building land, increased regulatory hurdles in virtually all construction sectors, high construction costs and a lack of skilled workers in the construction industry.
In 2015, exports of German goods to the oil states declined by 7.4%. This was the third fall in a row. Growing exports to the United Arab Emirates (primarily aircraft) and Saudi Arabia prevented an even worse result. As oil prices will initially remain low, German exports to the oil-producing countries are expected to fall again in 2016. Our export indicator points to a decline of approximately 5%. Among the major German industrial sectors, mechanical engineering is likely to be hardest hit by falling demand from the oil states, as was the case in 2015. Overall, the significance of the oil producers as a market for German industry will continue to decline in 2016.
Despite the challenging environment German exporters gained global market share in 2015. The year 2016 has not got off to an auspicious start, however. Our new “Export Indicator” points to a double whammy for German exports in 2016. The less favourable outlook for the demand and especially for the exchange rate impact looks set to slow export growth to around 3% in 2016. When analysing German exports, it is worth looking at sector-specific factors as they can play an even more important role than the macroeconomic environment. Overall, German industry faces a challenging year for exports. Further topics in this issue: House prices: Imminent return to normal, overvaluation likely; GDP growth 2016: More domestically driven & facing more downside risks; Merkel likely to weather even weak state election results.
Manufacturing output in Germany increased by 1.1% in real terms in 2015. Just over half of this growth resulted from 2015 having more working days than 2014. Among the main industrial sectors, pharmaceuticals (+4.3%) and automotives (+2.6%) recorded the highest growth rates. By contrast, the mechanical engineering and chemical industries suffered declines in production of 1.1% and 0.4% respectively. Mixed signals are currently shaping the outlook for 2016. For example, the slowdown in growth in major sales markets is being offset by a relatively high capacity utilisation rate in industry at the start of the year, as well as a positive trend in core orders. On the whole, we confirm our forecast that manufacturing output in Germany is not likely to do more than stagnate in 2016. Nevertheless, in light of global economic and geopolitical risks, as well as turmoil in the financial and commodities markets, a certain disturbing feeling remains to the effect that manufacturing output in Germany could also be worse than projected this year.
After three years of high GDP forecast accuracy, we were off the mark by a substantial margin in 2015. The miss can mainly be traced to our assumptions with regard to oil, the USD, the magnitude of the refugee influx and a bit of bad timing, as the USD and oil saw a massive adjustment right after we had published our 2015 forecast. Last year’s imponderables are once again at the top of our list of forecast uncertainties for 2016. In this issue we also look at the wage round in 2016 and Chancellor Merkel’s asylum policy.
The German economy was extremely stable over the course of 2015, although the volatile newsflow that ranged from the oil price shock, material euro exchange rate depreciation, “Dieselgate” right through to the refugee crisis could make one think otherwise. Driven by a 15-year high in private consumption growth economic output rose by more than 1 ½% in 2015, as already achieved in 2014. Economic growth is set to accelerate to nearly 2% in 2016, following a pretty stable trend over the course of the year. Private consumption should remain the most important growth driver. Public consumption will remain expansionary given the continued influx of refugees and resulting public spending. If refugees can be successfully integrated into the labour market, the refugee crisis will provide Germany's ageing society with a medium-term opportunity.
Industrial output in Germany is likely to expand by around 0.5% in real terms in 2015. For 2016, we expect growth close to zero. This means the sustained phase of relatively muted economic dynamics of industrial output seen since 2012 would continue. The rather stable development of producer prices in recent months also provides evidence that would indicate subdued industrial activity. Our forecast for industrial output implies that manufacturing’s share in total German gross value added will shrink for 2015 and 2016.