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Germany: Europe’s Hot-Spot?

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By Peter G Hall
Vice-President and Chief Economist Export Development Canada

Germany has hit the headlines incessantly in the post-recession period. Under the circumstances, they’d probably have preferred not to. It was at the center of the existential debates surrounding the implosion of the Greek economy and the severe weakening of its southern neighbours. It took the lead in moments of crisis. Its solid fundamentals, prudent management of policy and ability to create solutions placed it at the forefront of the issues that continue to dog the zone. Is Germany still the region’s hot-spot?

Recent data are impressive. The second-quarter flash estimate of GDP was above expectations, rising by 0.4% at quarterly rates. That followed solid first-quarter growth, and bucked a sudden stalling in France. In fact, things were slower in a lot of other places, including the US. Germany’s growth is coming from a blend of strong household consumption and robust net exports, which have doubtless benefited from the lower Euro.

Superior growth for Germany is not a new thing. Its growth has consistently outpaced its large Continental counterparts in the post-recession period. Since 2011, annualized growth has on average been 0.5 per cent above France’s growth numbers, and the gap with Italy is more like 1.5 percentage points. On average, Germany is well above Spain since 2011, although recently Spain’s resurgence has put it in the lead. While this has made Germany a needed engine of regional growth, higher average growth has also been a source of irritation between economies. Germany has clearly capitalized on weakening of the Euro, largely caused by weakness elsewhere, but not enough to counter-balance it.

Germany also stands tall when it comes to labour market performance. Using harmonized data, the recent unemployment rate is at a record-low 4.2 per cent in June, which falls under the very impressive US and UK numbers. At the same time, France has just dipped below double-digits, while Italy is still dealing with double-trouble, and Spain is still at 20 per cent.

That’s probably enough evidence to call Germany an ‘engine’ economy. But the hot-spot? Actually, at the same time, the UK economy has been able to generate higher growth during the reference period – in fact, close to a full percentage point higher. Harmonized unemployment might be at a lower rate in Germany, but the rate of decline in the unemployment rate has been a lot faster in the UK since 2011. At the same time, US growth has also outpaced Germany’s, and by a similar magnitude. If not the hot spot, Germany still is a hot spot.

This is important news for Canadian exporters. Germany is a top-10 destination for Canadian goods, second only to the UK among European economies. However, Canada’s track record in the market hasn’t been stellar. Average annual growth in merchandise exports has been a mere 1.1 per cent over the past decade, and was even weaker in the post-recession period. It is a lucrative market for sales of a wide variety of Canadian equipment and aerospace products (our number two export to Germany), but on the whole, recent growth has been weak, with a few key exceptions. It’s clearly a market with a lot of potential, but at the moment, it’s not a push-over for our sales.

If there’s a cloud on the immediate horizon for Germany, it’s probably the outcome of the British referendum. Surveys are indicating increased nervousness among business investors in Germany following the Brexit vote. With 7.5 per cent of Germany’s exports headed to the UK before the vote, there is a fair amount of activity that will depend on what the future deal between the UK and the continent really looks like. In the meantime, German businesses face the same dilemma that all businesses active in the European market face: the uncertainty of how to deploy investment in plant and equipment from now until the negotiators hammer out a new trade and political arrangement between the two parties. While some basic investment activity will be necessary for maintaining business flows, the more substantive and strategic projects are likely to be delayed, deferred or even cancelled.

The bottom line? Germany is a European mainstay, and has helped to navigate the economic zone through one of its most trying economic episodes. It will no doubt continue to outperform, but will be dogged by uncertainty for some time yet. For Canada, sales opportunities remain strong, if approached with care.

[Source: EDC]

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