Core Views
Although the German economy continues to fire on all cylinders, underpinning our constructive (above-consensus) outlook for Europe’s largest economy, we see leading expectations indicators cooling, suggesting that domestic demand conditions could begin to moderate.
Nevertheless, the high degree of economic competitiveness means that even with a ‘soft patch’ in global economic activity, German manufacturers should continue to benefit from demand in fast-growing emerging markets over the coming years.
Germany’s general government budget deficit will narrow below the prescribed 3% of GDP Maastricht limit as robust growth helps to strengthen the fiscal position. Nevertheless, more meaningful consolidation measures on the part of the government will be necessary to avoid higher debt servicing cost, especially with German contributions to EU bailout funds set to rise.
Major Forecast Changes
We have upped our 2011 real GDP growth forecast to 3.5%, as domestic demand, particularly fixed investment, positively surprised in Q111. Combined with strong confidence indicators and a tightening labour market, we are affirmed in our above-consensus view.
We have raised our general government revenue growth projections to 5.0% in 2011, from 2.6% previously, and see expenditure rising by a more moderate 2.1%, from the 2.3% previously forecast, which takes our fiscal deficit forecast down to 2.0% of GDP, from 3.1% previously.
Key Risks To Outlook
A deteriorating global economic outlook and the prospect of major fiscal austerity across Europe in the near-to-medium term could see
German exports underperform our current projections, in which we see the trade surplus coming in at 7.0% of GDP in 2011. The risk of financial contagion and political uncertainty in Italy threaten to deepen the eurozone’s sovereign debt crisis and require substantially larger fiscal transfers on the part of the largest European economies. This could derail Germany’s plans to reduce net borrowing requirements for the state.
Robust economic growth, improving consumer confidence and a tighter labour market could see household spending perform more strongly than currently factored into our forecasts. A key risk to our 3.5% real GDP growth forecast, therefore, is stronger private consumption
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Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Policy U-Turn Confirms Greens’ Entry To Mainstream Politics
Germany’s centre-right coalition government continues to grow increasingly unpopular amid controversial nuclear
energy policies in late 2010, on which Chancellor Angela Merkel has had to embarrassingly backtrack in recent months
Table: Political Overview8
Long-Term Political Outlook 10
Tackling The Demographic & Economic Challenges
The political challenges facing Germany over the coming decade are not so much centred around public policy as
trying to foster economic growth in east Germany, arresting (or managing) population decline and dealing with the
potential implications of further EU integration
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity I 14
Domestic Demand Prompts Growth Revision
Germany’s impressive economic growth in Q111 was driven primarily by strong domestic demand, encouraging
us to raise our full-year forecast to 35% from 30% previously
Table: ECONOMIC ACTIVITY14
Table: GDP BY EXPENDITURE, % CHG Y-O-Y15
Economic Activity II 16
Still Booming, Moderation Ahead
Germany’s ongoing economic recovery has further to run, and latest leading indicators support our above-consensus
outlook for economic growth in 2011
Balance of Payments 17
Exports To Remain Buoyed By High Competitiveness
A highly competitive economy and a well-diversified export market will keep Germany’s trade in goods surplus elevated
over the coming years
Table: CURRENT ACCOUNT18
Table: Top 3 Biggest Export Groups In 2010 By Country19
Monetary Policy 21
ECB Tightening Still On
Having held fire on altering policy rates since the last hike in April, the European Central Bank raised the refinancing
rate by 25bps to 150% on July 7
Fiscal Policy 22
Positive Fiscal Picture, But More Tightening Needed
Germany’s impressive economic recovery will see the general government budget deficit narrow to 20% of GDP
in 2011, well below the prescribed Maastricht 3% ceiling
Table: FISCAL POLICY22
Banking Sector 24
Lenders To Bank On Traditional Services
Chapter 3: 10-Year Forecast 27
The German Economy To 2020 27
Slipping From Fourth Place
Germany is set to slip from being the fourth-largest to the sixth-largest economy globally in nominal US dollar terms
over our 10-year forecast period, as a result of slow real GDP growth
Table: Long-Term Macroeconomic Forecasts27
Chapter 4: Business Environment 29
SWOT Analysis 29
BMI Business Environment Risk Ratings 29
Business Environment Outlook 30
Institutions 30
Table: BMI Business And Operation Risk Ratings30
Table: BMI Legal Framework Rating31
Infrastructure 32
Table: Labour Force Quality32
Market Outlook 33
Table: Trade And Investment Ratings33
Operational Risk 34
Table: Top Exports34
Chapter 5: Key Sectors 35
Telecommunications 35
Table: Telecoms Sector – Internet – Historical Data & Forecasts 40
Other Key Sectors 42
Table: Autos Sector Key Indicators42
Table: Food & Drink Sector Key Indicators42
Table: Oil & Gas Sector Key Indicators42
Table: Infrastructure Sector Key Indicators42
Table: Pharma Sector Key Indicators43
Table: Defence & Security Sector Key Indicators43
Table: Freight Transport Sector Key Indicators43
Chapter 6: BMI Global Assumptions 45
Global Outlook 45
Second Half Risks
TABLE: GLOBAL ASSUMPTIONS45
Table: EMERGING MARKETS AGGREGATE GROWTH46
Table: DEVELOPED STATES REAL GDP GROWTH FORECAST47
Table: REAL GDP GROWTH CONSENSUS FORECASTS47
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