Germany’s economy is continuing to expand at an exceptionally brisk underlying pace, the Bundesbank’s experts write in the January 2018 edition of the Bank’s Monthly Report. While they concede that the rate of growth registered in the fourth quarter of 2017 might fall somewhat short of the level observed one quarter earlier, they put this down in part to the brief lull in economic activity caused by two bridging days in October. “This will do nothing to dent the underlying strength and breadth of Germany’s economic upswing,” they note in the Monthly Report, highlighting that industrial orders and labour market conditions are in excellent shape, as is sentiment in both the business and consumer sectors.

Provisional calculations by the Federal Statistical Office indicate that German gross domestic product (GDP) expanded overall by 2.2% in real terms in 2017 (or 2.5% after calendar adjustment). Hence, aggregate growth outpaced the already rather strong rate of 1.9% registered back in 2016. “That owes much to a perceptible upturn in global activity, which provided broad stimulus for German industrial exports,” the Bank’s economists write. Industrial capacity utilisation levels rose substantially as a result, prompting businesses to step up their investment in new machinery and equipment.

Robust household consumption

The Monthly Report explains the role which construction investment played in boosting GDP growth, above all in the first half of the year, but goes on to observe that the construction sector probably moved ever closer towards its capacity limits during the remainder of the year. It also identifies household consumption, which has been fuelled by upbeat employment and income prospects, as another major factor behind the marked rate of growth in 2017.

Industrial output in November 2017 expanded by a very strong seasonally adjusted rate of 4¼% on the previous month. Taking the average for October and November, growth was a tangible ½% higher than in the third quarter. Manufacturers of chemical products saw their output increase at a particularly strong pace (+2¾%), while German mechanical engineering firms significantly increased their production rates (+1¼%), the Bank’s economists note. Car manufacturers suffered a significant drop in output, however (-1%). Industrial new orders in November contracted slightly, in seasonally adjusted terms, on the previous month, although, as the Bank’s economists point out, order flows had been growing at a very dynamic pace in the months beforehand: “Orders from German industrial firms are looking exceptionally good at the moment, and the impulses are broadly based.” Thus, demand from other euro area countries was particularly vibrant, up by 4%, while new orders from non-euro area states and from German customers climbed by 3¾% and 1¼%, respectively. Activity in the construction sector is reportedly at a very high level overall, and order books there are still well filled.

Fewer people out of work, prices increasing

The latest Monthly Report notes that conditions in Germany’s labour market have improved further, explaining that the number of people in work rose in November 2017 by a seasonally adjusted 50,000 on the month and by 613,000 on the year (+1.4%). Seasonally adjusted unemployment experienced a relatively sharp month-on-month decline in December, when 2.44 million people were registered jobless, 29,000 fewer than in November. The unemployment rate was 5.5% at last count. Compared with the previous year, 183,000 fewer persons were out of work, and the unemployment rate came in 0.5 percentage point lower.

Consumer price inflation (HICP), on the other hand, was up noticeably at the end of the year, by a seasonally adjusted 0.3% on the month. In a year-on-year comparison, consumer price inflation came in at 1.6%. The Bundesbank’s experts expect inflation to continue rising as aggregate overutilisation increases.