May issue of the Monthly Report: private consumption driving the German economy

The Bundesbank believes that the German economy will continue to grow in the coming months. Private consumption is likely to be the greatest driver, according to the May issue of the Monthly Report. The construction sector will probably also pick up more pace. The Bundesbank's economists expect merely sluggish growth in industry, despite a healthy economic upswing.

In the first three months of the year, the German economy grew by 0.3% in real terms, according to an initial estimate by the Federal Statistical Office. This puts the increase significantly below that of the previous quarter, in which growth had still stood at 0.7%. According to the Bundesbank, the domestic economy also saw brisk growth in the early months of 2015. However, exports were hampered by a dip in global economic activity, while imports grew substantially.

Consumption the key driver of growth

Private consumption grew especially strongly in the first quarter of 2015. The Monthly Report provides a number of reasons for this: rising employment combined with distinctly increasing wages, a substantial rise in purchasing power on account of the plummeting oil prices, and the impact of economic policy instruments such as the introduction of the option to retire on a full pension at the age of 63, the mothers' pension and the general minimum wage.

In the coming months, the Bundesbank's economists expect that households will continue to make use of the growing scope for expenditure for consumption purposes. The main impact of the substantial drop in the price of oil and the pension policy measures has already been felt, according to the Monthly Report. Additional scope could be provided by increasing employment and higher negotiated wages, however. Income growth owing to the minimum wage is likely to affect households, which spend a large part of their income on consumption.

Subdued exports, higher imports

In the first quarter of 2015, German firms' foreign business failed to maintain the momentum experienced in the second half of 2014. The Bundesbank's economists believe that this is due, in particular, to the flagging global economy. "In China, growth in real gross domestic product (GDP) slowed distinctly, while GDP in Russia and Brazil probably even shrank on the previous quarter," the Monthly Report states. Growth in the US economy virtually came to a standstill, it notes, while the dip in global economic activity hampered the exports of German enterprises. The depreciation of the euro, which makes goods and services – including those of German enterprises – cheaper for buyers outside the euro area, could not compensate for this effect, according to the Bundesbank. "The effects of the depreciation in the euro, as might be expected, only normally become apparent after some time has elapsed," the economists commented. Imports by German enterprises grew in the first quarter of 2015, however.

The Bundesbank anticipates that growth in German industry will be rather sluggish in the coming months, but the economic upswing will be robust. Growth in orders, for instance, was disappointing overall at the start of the year. "Nevertheless, the improving global economy and the comparatively low external value of the euro should soon open up new opportunities to export goods to markets outside the euro area," predict the Bundesbank's economists.