German economy grew strongly in 2017

The German economy recorded strong growth last year. Initial calculations by the country’s Federal Statistical Office (Destatis) indicate that price-adjusted gross domestic product (GDP) was up by 2.2% compared with 2016, which is the strongest rate of growth in six years. In calendar-adjusted terms, growth increased by as much as 2.5% on the year owing to the fact that, in arithmetical terms, there were three fewer working days in 2017 than in 2016. According to its latest forecast of mid-December 2017, the Bundesbank had expected price and calendar-adjusted growth of 2.6%.

The German economy has therefore been expanding for eight consecutive years now. Growth in 2017 was almost one percentage point above the average growth rate of the past ten years (1.3%). The positive trend continued to pick up momentum compared with the previous years: in 2015 and 2016, price-adjusted GDP increased by 1.7% and 1.9% respectively.

Strong increase in consumption and investment

Consumption and investment were important expenditure-side factors behind this positive development in 2017. According to figures from Destatis, private consumption expanded by a price-adjusted 2.0% on the year and government consumption also rose by 1.4%. This growth was not as strong as in the previous year, however. Gross fixed capital formation experienced above-average growth of 3.0% on the year. Construction investment likewise increased significantly, by 2.6%. Machinery and equipment (a category which also includes transport equipment) attracted more investment (+3.5%) than in 2016, after adjustment for price effects. Other investment, a category which includes spending on research and development, among other things, also exceeded the previous year’s level by 3.5%. Overall gross investment, which includes gross fixed capital formation and changes in inventories, was up 3.6% on the figure for 2016 in price-adjusted terms.

German exports also posted further growth in 2017. Price-adjusted exports of goods and services climbed by 4.7% on the year. Imports increased even more strongly (+5.2%) during the same period.

On the output side, almost all economic sectors saw positive developments last year, according to data from Destatis. This is particularly true of the information and communication (+3.9), trade and transport and hotel and restaurant sectors (+2.9%). The production sector, excluding construction, and the construction sector grew at a similarly strong pace (+2.5% and +2.2% respectively).

With just under 44.3 million persons in employment in Germany, the rate of employment reached its highest level since the country’s reunification. Initial calculations by Destatis indicate that around 638,000 or 1.5% more persons were in employment in 2017 compared with 2016. This increase, which is the highest since 2007, was the result of a rise in employment subject to social security contributions.

Forecast: growth set to continue in 2018

The Deutsche Bundesbank anticipates that the German economy will continue to grow strongly in 2018, too. "We will see a persistently high underlying pace of economic growth not only in the final quarter of 2017 and the first quarter of 2018, but also over the remainder of 2018, during which time the German economy will grow robustly," said Bundesbank President Jens Weidmann in December 2017 at the unveiling of the Bank's latest semi-annual economic projection. Driven by lively foreign demand, the manufacturing sector is seeing dynamic growth and the sharp upturn in business investment is persisting, according to the projection. The Bundesbank's economists are expecting the German economy to expand by a calendar-adjusted 2.5% in 2018. In 2019 and 2020, they are expecting lower growth rates of 1.7% and 1.5% respectively. "The further growth potential is being constrained, above all, by strong capacity utilisation and, in particular, labour shortages," Mr Weidmann commented in December 2017.