Germany: Tentative Signs of Recovery

Consensus Forecasts

Recent indicators suggest that the German recovery is gaining traction, with many observers predicting that Q2 GDP likely significantly outstripped the 0.1% (q-o-q) expansion seen in Q1. The labour market unexpectedly strengthened in June as the number of people out of work fell by 12,000 and the jobless rate stood unchanged from the downwardly-revised 6.8% figure recorded in May. Domestic demand supported Q1 activity and going into May, retail sales surpassed expectations by rebounding by 0.8% (m-o-m). Low unemployment, together with firm wage increases, lifted consumer sentiment to a near-six-year high in June which is welcome news for Chancellor Angela Merkel ahead of September’s elections. Elsewhere, business morale improved in June as the IFO index edged up from 105.7 in May to 105.9 In June, due largely to more upbeat export prospects. However, after rising by 1.4% (m-o-m) in April, exports unexpectedly shrank by 2.4% in May, denting hopes of a sustained upturn in foreign demand. Industrial production also failed to continue its recent positive momentum into May, contracting by 1.0% (m-o-m). In addition, a renewed drop in new orders saw the PMI for manufacturing fall deeper into contractionary territory in June, dropping from 49.4 in May to 48.6. On balance, our panel has reduced its 2013 GDP forecast this month.

Consumer price inflation quickened to 1.8% (y-o-y) in June, from 1.5% in May, due largely to a marked rise in food and energy prices. The consensus for 2013 inflation remains unchanged at 1.6% this month, although many observers expect robust wage growth to bring it close to the ECB target of 2% in 2014.

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