German consumers will continue to play a subordinate role in the country’s strengthening economic recovery, Bundesbank president Axel Weber told Emerging Markets, sounding a note of caution amid a generally upbeat assessment of Europe’s biggest economy.
With the scene set for Germany’s best growth performance since 2000, the central bank has plenty of grounds for optimism. GDP is widely expected to expand about 1.8% this year, up from 1.2% in 2005, but household spending will lag behind.
“Exports have been expanding at a rapid pace thanks to buoyant global demand and the favourable price competitiveness of German firms. In addition to this, investment in machinery and equipment has also picked up and now constitutes the second pillar of the recovery,” Weber said in comments e-mailed to Emerging Markets at the end of last month. “A breakthrough in private consumption is, however, not expected in the near future despite some recent improvements.”
Private sector economists say they’re not worried about imbalance in the drivers of growth. Holger Schmieding, co-chief European economist at Bank of America, predicts that retail sales are on the verge of picking up and overall growth appears more sustainable than it was last year.
“Germany has made a transition from being export led to being better balanced,” Schmieding told Emerging Markets. “People are managing to open up their purses a bit.”
Nevertheless, a hike in VAT next year will constrain consumption at the beginning of 2007, dragging back GDP growth, according to Schmieding.
On the business side, Weber forecasts that high German exports of machinery and equipment will benefit suppliers in neighbouring countries as import growth climbs. He pointed out that imports of investment goods nominally gained 20% in the first two months of the year and intermediate goods saw a 14% jump.
“Investment in machinery and equipment is expected to continue its upward trend,” Weber said, adding that it will “contribute significantly to GDP growth in Germany.”