Summary of the December Monthly Report
Outlook for the German economy – macroeconomic projections for 2015 and 2016
Following a brisk start to the year, which was not due solely to favourable weather conditions, the German economy moved onto a flatter growth path in the second and third quarters of 2014 and thus did not live up to the expectations of the Bundesbank’s June outlook. Nor is a major improvement on the horizon for the final quarter of 2014 and first quarter of 2015. However, there is reason to hope that the current weak phase will prove to be temporary. The German economy remains in remarkably good shape, which is not only benefiting domestic activity but also enabling German exporters to seize opportunities on foreign markets. Such opportunities should increase again over the course of 2015 provided that the economic recovery in the euro area strengthens and world trade gathers momentum.
Under these conditions, growth of 1.4% in Germany's real gross domestic product (GDP) this year could be followed by a rise of 1.0% in 2015 and of 1.6% in 2016. After working-day adjustment, real GDP growth would come to 1.4% in 2014, 0.8% in 2015, and 1.5% in 2016. On average, these increases are slightly above the potential growth of just over 1% per year, which means that aggregate capacity utilisation should rise somewhat but remain at a normal level over the entire forecast horizon. Growth in potential output will be supported by immigration but dampened by new rules enabling some workers to draw a full pension at 63 and by the forthcoming introduction of a general minimum wage in Germany. Unemployment, which – under the current institutional framework – is now largely reduced to its frictional and structural core, will probably see little change over the forecast horizon. A temporary deceleration in negotiated wage rises is likely to be offset by the new general minimum wage in terms of actual earnings. General government is set to post a slight budget deficit next year given the substantial growth in expenditure.
The rise of just under 3% per year in wages will increasingly be reflected in somewhat higher consumer price inflation. As measured by the Harmonised Index of Consumer Prices (HICP), inflation could rise from 0.9% this year to 1.1% in 2015 and 1.8% in 2016, based on the assumption of unchanged exchange rates and a slight rebound in crude oil prices. Excluding energy, HICP inflation would climb to 2.0% in 2016.
Since this forecast was finalised, Brent crude oil prices have fallen substantially. They are thus an average of just over 11% below the assumptions underlying the forecast. A fall of this size in crude oil prices points to the need for a downward revision of the inflation forecast and an upward revision of projected GDP growth. If the low crude oil prices were to endure, projected HICP inflation for 2015 would need to be lowered by 0.4 percentage point. The repercussions for the real economy are more difficult to quantify. However, economic growth could consequently be 0.1 to 0.2 percentage point higher in the two coming years.
German enterprises' profitability and financing in 2013
The profitability of German non-financial corporations for 2013 as a whole was not quite as good as that in the first three years after overcoming the severe recession of 2008. Pre-tax profits in 2013 amounted to only 4% of sales in the reporting year, compared with 4¼% in the years 2010 to 2012. In a setting of stagnating earnings, this was due primarily to the considerably higher personnel expenses. This cost factor rose in some parts of the manufacturing industry in particular, whereas sales recovered only gradually following the temporary lull in the fourth quarter of 2012 and the first quarter of 2013. Personnel expenses were up not only on account of negotiated pay rises, however, but also because industrial enterprises were continuing to expand their workforce despite the slowdown in economic activity. This may be interpreted as an indication of staff planning geared to the medium to long term. The expansion strategy is particularly noticeable in the manufacture of transport equipment, especially as there was also a sharp rise in physical capital in this area. On the other hand, increases in tangible fixed assets throughout the non-financial corporate sector remained moderate in 2013, as in the previous years. The acquisition of other long-term equity investments was also down in the reporting period, whereas such transactions were numerous in 2012. Exceptions here were car manufacturers as well as energy and water supply companies, which substantially raised their holdings of other long-term equity investments. The need for long-term debt financing remained limited, not least because of the broadened scope for funding operations internally. It became necessary to step up provisions for pensions given the low level of interest rates. The marked improvement in economic activity during 2013 is reflected in the movements of inventories and financial current assets. Output was stepped up in the manufacturing sector; as a result, warehouses were less full as at the reporting date than one year earlier, and finished goods were sold quickly, particularly towards the end of the year. This was one of the reasons why cash was higher, whereas trade receivables did not increase. This suggests a tendency to give preference to shorter credit terms for the supply of goods and services due probably, not least, to the very low interest rates.
Enterprises were endeavouring again in 2013 to consolidate their capital base further. This was particularly true of small and medium-sized enterprises, whose capital ratio was 3 percentage points below the average of 28% across size categories and economic sectors. In contrast, big firms have been increasing their equity in step with total assets since 2010; the capital ratio is hovering at just below the 30% mark. However, it appears unlikely that this ratio will be maintained in the current year. In any event, according to preliminary information from the consolidated financial statements statistics, the increase in the capital base of listed non-financial groups was failing to keep pace with balance sheet growth up to the end of the third quarter of 2014. Furthermore, latest group data suggest that profitability in the corporate sector as a whole is likely to have benefited in the current year from the decline in prices of raw materials and intermediate goods.