2014 - year of growth for Germany?
May 19, 2014
The German economy grew strongly in the first quarter of 2014 and all signs point towards a recovery. However, there are still risks in the form of the Ukraine crisis and a weakening eurozone.
Logging 0.8-percent growth in the previous quarter - the German economy had not grown so strongly for three years. The rate of employment has also increased significantly in recent months, consumer spending picked up and over the past year, German companies have begun investing heavily again.
All indicators suggest that 2014 will be a year of growth. "If such momentum has developed, I think we can be very confident about this year’s growth," says Rolf Schneider, economist at Allianz. He projects a growth rate of 2 percent for the whole year, compared with a mere 0.4 percent last year.
However, it should be noted that relatively mild winter conditions in the first quarter greatly favored the economic expansion as construction sector activity kept pace.
"This has boosted growth by some 0.3 to 0.4 percentage points," Ralph Solveen, economist at Germany’s Commerzbank, told DW, adding that in the years with cold winters, building activity generally picked up in the second quarter.
Ukraine crisis and strong euro
Even though low inflation and falling unemployment rates are good news for investors and consumers, there are numerous risks that threaten the growth prospects. "The political risk posed by the Ukraine crisis is the biggest threat facing Germany’s economic expansion," said economist Schneider.
German consumer spending picked up in the last quarter
If the conflict worsened and should there be more economic sanctions against Russia, then it would also impact Germany, he added. German exports to Russia plummeted by 16 percent in the first two months of this year. At the same time, shipments to Ukraine fell by a fifth.
In addition, the value of the euro keeps rising. Although a strong currency is no cause for concern for Germany, it hurts the competitiveness of other crisis-stricken eurozone countries which in turn endangers the German economy as 40 percent of its exports go to the nations sharing the single currency.
Missing growth
In most euro area countries, the recovery remains modest. While the economies of Portugal and Cyprus shrank by 0.1 percent, Italy’s slumped by 0.7 percent compared with the previous quarter. The French economy, the second largest in the monetary union, stagnated during this period.
Nevertheless, economic expert Schneider remains optimistic: "In recent months, we have seen stabilization in the region’s economic situation, even though the first quarter is a bit disappointing." Aggregate demand in Europe was increasing again, which was a positive sign for German economic growth, Schneider explained.
It is vital that investment conditions remain favorable in order to achieve sustained growth, according to Schneider.
"If production capacity is strengthened and promoted within the country, then - despite all the risks - 2014 could be a successful year in terms of economic growth."
Source: Deutsche Welle