New Market Research Report: Germany Business Forecast Report Q3 2013

From: Fast Market Research, Inc.
Published: Thu May 23 2013

While weak economic data out of Germany has been in line with our below-consensus real GDP growth estimate for 2012, the collapse in business and consumer confidence has prompted us to revise down our 2013 GDP projections. We expect growth to recover in the second half of the year, although this will be mainly driven by external rather than domestic demand.

We still believe a grand coalition between Germany's centre-right Christian Democrats (CDU-CSU) and the centre-left Social Democratic Party (SPD) remains the most likely outcome following the September 2013 general election. Under such a government we would expect slightly less focus on fiscal austerity both at home and for periphery eurozone states, which would be net positive for domestic demand and the future of the single currency.

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Improved terms of trade with Asia have prompted us to revise up our medium-term forecast for Germany's current account surplus. While we expect moderately narrower surpluses over the next few years, we see little chance of Germany running a current account deficit for at least the next five years.

Major Forecast Changes

We have revised down our 2013 real GDP growth forecast to Germany from 1.3% to 0.8%, on the back of the recent drop in business and consumer confidence readings.

We have revised up our current account surplus forecast for 2013, from 6.3% of GDP to 6.9%.

Key Risks To Outlook

We see downside risks to our 2013 real GDP growth forecasts coming from domestic and external factors. On the domestic front, uncertainty surrounding policy beyond the 2013 general election could see domestic demand stagnate this year, while the outlook for German exports is clouded by question marks over Asian demand and the sustainability of China's economic stimulus. The trajectory of the euro poses another risk to our positive net exports view. At present we believe that persistent problems with periphery states will keep the currency on the back foot over the next few years, but there is the possibility that as tail risks to the currency union dissipate, the euro stages a relief rally, hurting Germany's terms of trade in the process.

The main risk to our fiscal forecasts is that the German economy, particularly private consumption, performs better than we currently anticipate. This would reduce the need for higher levels of fiscal expenditure (either at home or in periphery eurozone states), while boosting fiscal revenue. Weakening labour market indicators suggest to us that this is unlikely to happen over the next 18 months, but beyond 2013 there is a chance that the German consumer starts spending.

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