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Economic forecast 2014

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Following a lukewarm start to 2013 the German economy has gathered steam since the spring. Second-quarter growth of 0.7 percent was buoyed by catch-up effects in the construction sector, but further production increases are on the cards in the second half of the year. In industry, both the assessment of the current situation and business expectations have improved substantially since the end of last year.

Allianz SE
Munich, Nov 07, 2013

“Both exports and domestic demand were providing a lift towards the end of 2013. The nascent pickup in the global economy and the stabilization in the eurozone will probably trigger appreciable increases in German exports,” said Michael Heise, Chief Economist at Allianz. With construction order books brimming, a further expansion in output is likely. In the second half of the year disposable income looks set to rise more strongly than in the first half, buoying consumer demand. With capacity utilization somewhat higher, machinery and equipment investment is likely to pick up. All in all, gross domestic product growth is likely to come in at 0.4 percent in the third quarter and 0.6 percent in the final three months of the year. This would result in estimated average growth of 0.6 percent in 2013.


The positive economic trend looks set to continue in 2014. “With monetary policy still ultra-loose, the eurozone economy perking up, consolidation pressure inGermanylow and the labor market robust, a solid foundation is there for stronger economic expansion after two years of modest growth. With a favorable global economic backdrop, the pace of growth in the German economy could reach 2.0 percent in the course of 2014”, said Heise. Thanks to the overhang at the beginning of the year this also corresponds to annual average growth of 2.0 percent.


The positive economic trend looks set to continue in 2014. “With monetary policy still ultra-loose, the eurozone economy perking up, consolidation pressure inGermanylow and the labor market robust, a solid foundation is there for stronger economic expansion after two years of modest growth. With a favorable global economic backdrop, the pace of growth in the German economy could reach 2.0 percent in the course of 2014”, said Heise. Thanks to the overhang at the beginning of the year this also corresponds to annual average growth of 2.0 percent.


However, this forecast is based exclusively on the economic and fiscal policy measures for 2013 and 2014 passed by the outgoing government. The ongoing coalition negotiations between CDU/CSU and SPD point to substantial adjustments/changes. “The discussion about higher state spending, additional welfare benefits and a national minimum wage needs to be viewed with some concern with regard to Germany’s economic outlook”, according to Heise.

 

Although the price competitiveness of German exporters has slipped compared with last year, due to the appreciable rise in the effective exchange rate of the euro and the fairly steep rise in German unit labor costs, viewed long term it is still well above average. On the competitiveness side, therefore, the prospects are good that German exporters will benefit from the growth in world trade. The economic recovery in the eurozone removes one negative factor. With their focus on capital goods, German exporters could even enjoy an advantage given that the propensity to invest looks poised to rise again around the globe. German exports of good and services are likely to increase by 5.3 percent real in 2014 after a mere 1.0 percent this year, and thus in line with the expansion in world trade.


The moderate expansion in private consumption looks set to continue. Although low inflation has helped to curb purchasing power losses in the year to date, the increase in disposable income in the first half of 2013 was only modest and real incomes were actually down slightly on a year earlier. That private consumption nonetheless recorded a real increase is attributable to a marked rise in the propensity to consume or, put differently, a drop in the propensity to save. However, in the second half of 2013 and particularly in 2014, the outlook for both income streams is brighter.


All in all disposable income is likely to increase by only 2.1 percent this year, with a substantially steeper rise of 3.4 percent on the cards next year thanks to a steeper rise in labor income, the prospect of higher pension adjustments and a slight acceleration in entrepreneurial earnings. The savings rate, which has been tending downwards since 2008 (11.5 percent), looks set to fall to around 10 percent in 2013 and 2014. “There is no doubt that ultra-low interest rates are rendering savings less attractive than they used to be”, according to Heise.


The pickup in capacity utilization and healthy corporate earnings figures provide a favorable backdrop for a further recovery in investment activity. Should the European debt crisis continue to subside and there is no renewed deterioration in the external environment, equipment investment is likely to move onto an expansion path. Heise: “This can also be attributed to the fact that shelved investments are enacted once the economy picks up again. With financing conditions set to remain very favorable for a longer spell and companies able to draw on abundant equity financing and liquidity, we see good prospects that investment will regain more momentum over the forecast period.”


Despite the lull in the economy in the winter of 2012/13, job creation inGermanywas not interrupted. The number of people in work has been rising steadily month for month since late 2012. In view of this development notwithstanding modest capacity utilization levels, we are not expecting a further substantial acceleration in the rise in employment at the end of this year nor next as the economy picks up. The number of people in work is likely to rise by more than 250,000 in 2013 and by around 300,000 in 2014. The strongest growth in jobs will be seen in business services and health and welfare.


The rise in employment is still not being reflected in a corresponding drop in unemployment. This stems from the rising number of older people and women joining the workforce and the large immigration of workers from abroad. Both factors are more than offsetting the decline in the domestic working-age population. The number of people out of work has edged up slightly in the course of the year so far. Towards the end of the year unemployment will probably stagnate and then fall slightly in the course of 2014. The average jobless total in 2013 will be 50,000 higher than in 2012 at 2.95 million. In 2014 the figure will fall by 30,000 to 2.92 million. Within the EU,Germanywill continue to have the second lowest unemployment rate behindAustria.


After an indifferent start to the year the world economy gained momentum in the second quarter, thanks mainly to an improved picture in the industrial countries. Particularly encouraging was the return to positive GDP growth in the eurozone following six negative quarters. In theUSAand theUKoverall output picked up again after only tepid growth at the start of the year. In addition, the economic recovery inJapancontinued on a broader footing thanks to the expansionary monetary and fiscal policy stance. By contrast, economic expansion in most emerging markets remained fairly subdued.


Global output will expand by 2.3 percent this year, marginally weaker than last year. With the economy currently firming up in the advanced economies and the attendant upturn in the emerging markets, above all inEastern Europe, global output growth in 2014 is likely to be stronger than this year at 3.1 percent.


Like 2013, next year will be a challenging one – for financial markets in particular. We expect to see a gradual exit from crisis mode in monetary policy, led by theUS Fed reining in its asset purchases. Given its concerns about money market rates, banking liquidity and lending growth, the European Central Bank might slightly ease its monetary stance – despite the nascent recovery in the eurozone – before finally changing course in late 2014. Heise: “Even though monetary policy would remain highly accommodative, initial corrective steps could be accompanied by pronounced swings on the markets.”


For now at least, the biggest single risk to the global economy – fiscal gridlock in theUS– has been defused. At the last minute a temporary solution was found covering both funding of the budget and the debt ceiling. Failure to reach agreement would have triggered a recession in theUS, dragging the world economy down with it. In our forecast we are assuming that a renewed crisis is avoided. In the interests of theUSAand the world economy, the political forces are likely to find a compromise.