Germany powers ahead as yet another economy benefits from falling inflation

It was only yesterday that I examined a danger to the German financial system via the ongoing problems of some of its Landesbanken. In that particular instance it was Bayerische Landesbanken which continues to see more problems pile up after its ill-fated investment in Hypo Alpe Adri Bank of Austria. However there are signs that the real economy in Germany is gaining some momentum and it is this which I wish to examine today.

Today’s news

It would appear that the retail sector in Germany is in rude health if today’s release from the German statistics office is any guide.

retail turnover in January 2015 in Germany increased 5.3% in real terms and 4.1% in nominal terms compared with the corresponding month of the previous year……This was the highest real rate of change compared to the previous year’s month since June 2010 ( + 6.0%)

When adjusted for calendar and seasonal variations (Census-X-12-ARIMA), the January turnover was in real terms 2.9% and in nominal terms 2.2% larger than that in December 2014.

As you can see this is quite a strong number and in fact if repeated in 2015 would help with one of the Euro areas main issues which is that it would like domestic demand in Germany to be higher. On this road Germany would suck in imports from the rest of the Euro area and give them a boost too. These are the stuff of Euro area fantasies but to some extent in January they looked as if they might come true.

Wages in Germany

Some of this improvement can be put done to some outright wage growth in Germany as highlighted below by Reuters.

German negotiated wages including special payments climbed by 3.2 percent on average last year – the biggest increase since the statistics were first compiled in 2010 – boding well for private consumption to drive growth this year.

I note that such wages cover a large group and led to real wage increases for them.

Wages for the roughly 19 million workers covered by negotiated wage deals rose more than three times as steeply as inflation, which was at 0.9 percent on average last year.

The increase was far stronger than in 2013, when workers under collective wage agreements had a 2.4 percent pay hike and in 2012, when their paychecks increased by 2.7 percent.

I think that “far stronger” is going a bit far but there was an improvement in nominal wage growth. But a major player here has been the fall in inflation which has led to a further boost to real wages. In many ways this is a repetition of the positive impact of falling inflation which I discussed as a boost to the UK,Spanish and Irish economies back on the 29th of January.


This is of course rather contrary to one of the themes of these times but for the moment Germany has found itself in an oasis of real wage growth. As we look forwards some of this appears to be continuing. From Reuters.

Engineering union IG Metall secured a 3.4 percent wage increase for 15 months from April plus a one-off payment of 150 euros in a deal that is likely to benefit 3.7 million workers.



This part of the labour market appears to be in good health too.

In January 2015, roughly 42.5 million persons resident in Germany were in employment according to provisional calculations of the Federal Statistical Office (Destatis). That was an increase of 412,000, or 1.0%, compared with January 2014. The year-on-year increase in employment thus continued unabated.


What is not to like about more people in employment earning higher nominal and real wages?

Low Inflation As An Economic Benefit

On Friday we were told this by the German statistics office.

The inflation rate in Germany as measured by the consumer price index is expected to rise 0.1% in February 2015 on a year earlier.


I wanted to reinforce the point that so far the falls in inflation have given the German economy a boost. This is very different from the media spinning and the use of the word deflation as something of a threat. You know the economic world is about to end and in some extreme instances has ended! Oh and as to actual deflation which is a fall in aggregate demand.

The German economy gained momentum again towards the end of the year…. the gross domestic product (GDP) increased by 0.7% (adjusted for price, seasonal and calendar effects) in the fourth quarter of 2014 compared with the third quarter of 2014. ……….As reported earlier, this resulted in a 1.6% increase (also adjusted for calendar effects) for the whole of 2014, which is even slightly higher than the provisional figure published in January.


As you can see from the numbers above it looks as though the falling inflation period has been accompanied by an acceleration in the engine room of Germany’s economy. As ever correlation does not prove causation but it is in my opinion building a strong case.

Also we see a familiar break down of the inflation as whilst prices are falling in the good sector at an annual rate of 1.4% they are rising in the services sector by the same amount.

Looking Forwards

The latest business surveys point towards more economic growth for Germany.

Private sector activity growth in Germany
accelerated further in February, as highlighted by
the seasonally adjusted Markit Flash Germany
Composite Output Index rising from January’s
53.5 to a seven-month high of 54.3. Survey
participants commented that strong order intakes
and a positive economic environment contributed to
the latest increase in output.


This was from late February and yesterday we were told that the manufacturing sector has edged forwards.

The slight improvement in the headline number
largely reflected a stronger rise in new business
placed with German manufacturing companies.


The Euro depreciation

If there is a Euro area economy which is likely to benefit from the recent fall of the Euro then let me present the German economic locomotive. Whilst the largest and indeed sharpest falls have come since mid-December last the effective rate of the Euro has been falling over the past year and has dropped from nearly 105 to below 94. Thus there will be a competitive advantage provided to all Euro area businesses who are in price competitive areas and Germany is likely to be in the fore front of this. Any inflationary impact has coincidently been more than offset by the fall in commodity and oil prices which has taken place.


First let me welcome what is good news. Let me welcome it with the words of the Fab Four.

Here comes the sun
Here comes the sun,
and I say, It’s all right

It is a very spring like metaphor as we wait for it to well, spring. It is also very different to what the middle of 2014 looked like for Germany.

Little darling
It’s been a long, cold lonely winter
Little darling
It feels like years since it’s been here

I guess it shows us what a falling oil price combined with a falling exchange rate does to an exporting nation and how quickly it can fire up the engines. Where this leaves the European Central Bank with its plans to further expand monetary policy via some 1.1 trillion Euro’s of Quantitative Easing I am much less sure. The largest recipient of this will be the Germany of economic growth as monetary policy goes pro-cyclical.

Number Crunching

After yesterday’s update on the problems of Heta Bank and Austria it is revealing of these times to note this. (H/T @Schuldensuehner )

Minus is the new normal. #Austria sells 5yr Bonds at -0.038%, First negative yield at an auction.


13 thoughts on “Germany powers ahead as yet another economy benefits from falling inflation

  1. Hi Shaun

    Great article.

    Could the uk’s flirtation with ‘deflation’ be drawing to an end. I’ve noticed that petrol bottomed out at 1.03/ltr its now back up to 1.07. Also what will be the impact of Euro QE? Has it started yet? I can imagine a wall of hot money being used to buy up cheap commodities like oil?

    • Hi Anteos

      The first phase of the UK flirtation with what the media calls “deflation” will have faded a bit in February as oil prices rose. Brent Crude Oil rose by nearly US $8 per barrel in February and as you say this impacted on petrol and diesel at the pump.

      The minor parts of ECB QE started last autumn in October if I remember rightly but the ECB has struggled to buy many ABS’s or Covered Bonds. The major part begins soon but there have been two effects so far.

      1. The way that the Euro has depreciated although this (as is often the case) was on the expectation of it and the reality has not impacted greatly.

      2. The falls in Euro area bond yields especially in the periphery. Portugal stands out for me but I guess others will think of alternatives.

  2. Hi Shaun, as we all know, so much in life is all about lucky timing. Up until now, Mario Draghi has seemingly been the right man in the right place at the right time. The timing of the Euro collapse combined with the oil price falls and ZIRP will really fire up the engines of postponed spending and should help the EZ as a whole.

    However, I just if wonder Mario’s tactics (which I recently heard were called SUMO or Smart Unconventional Monetary Operations) might play out in Germany?Will it result in him meeting a fearsome fattened-up Yokozuna in the form of Big Mutti Merkel in an economic torikiri. She must be very concerned about storing up too much bad inflation. Poor old Schaubel must be going absolutely bananas about IG Metal negotiating a 3.4% pay rise. There can only be one winner, as ever…


    • Hi Andy

      Yes events have tended to smile on Mario not least that he got out of the Bank of Italy before the issues over banking supervision on his watch arose! This time around he is likely to be able to bask in something of a recovery which he will (falsely) attribute to his QE policy. I will be interested to see how the laggards -France and Italy- respond.

      As to the Germans well I guess growth and low/no inflation has muzzled their dogs of war. But Jens Weidmann does not see it like that.

      “Why does it increasingly appear as though Germany is isolated internationally in the economic policy debate?

      That’s not the impression I have gained in the ECB Governing Council, the Eurogroup or in other international forums. What I do see, though, is that a number of economists – chiefly in the United States – do not consider all the facets of what makes European monetary union so unique. Some in these quarters are quick to call for joint liability or monetary financing of the public sector …”

  3. Hi Shaun,
    Another factor in Germany’s economic fortunes may be the willingness of Germans to relocate within the country to find well/better paid paid work. I posted a comment a while ago about low and falling house prices in Saxony. I have done a bit more digging and it would appear that the average age in Saxony is rising with state statistics showing a rise from 39 in 1990 to about 45 now and predicting a change to 49 by 2020. Other than the cities of Dresden and Leipzig which show small increases in population the rest of the state is losing people with a net loss of nearly 20% between 1990 (4.8 million) and 2020 (predicted 3.9 million). This change has occurred so far at a fairly steady rate. Most appear to have moved in the direction of Bavaria. A bigger rented sector for housing and lower capital costs in Germany have probably facilitated this transfer of population. Workers who speak the language, do not present the same fears as non national migrants and who are willing to move

    I do not think we have had similar internal population shifts in the UK but our high rate of net inward migration makes us a rather different case.

  4. Hi Shaun,

    “I guess it shows us what a falling oil price combined with a falling exchange rate does to an exporting nation and how quickly it can fire up the engines” – and don’t forget Germany’s steadily rising M1 supply since last summer.

    This is rather stronger than my predicted growth rate (when all others said the EZ including Germany was doomed) but it is only 1 month and I expect the numbers to fall back as the year progresses (at which point no doubt everyone will once more pronounce the end is nigh) although Germany will still make comparatively good growth over the year.

    On Germany rebalancing itself, do you have Germany’s import/export numbers for January please?

    • Hi Noo2

      The inventories position means that the first quarter overall could see a dip before any resumption of solid growth in Germany. Of course all of this is predicated in particular on the oil price (Brent Crude) being US $60 or below. Narrow money is having a good phase as a predictor although of course other factors have helped recently…

      As to the January trade figures they are due on the 9th according to the Federal Statistics Office.

  5. Shaun, Thanks for reporting the good news too. I can’t help but think the Germans again are prospering whilst other nations cannot. In the UK we have a prediliction for German metal, I can’t imagine just how ectactic the merc, audi and beemer dealerships will be in pocketing the new margin £ v € or even passing on the better value. It is like the whole godawful outcome was aimed at getting those latest electric BMWs on to our driveways and reasserting DE manufacturing pre eminence.. Just how is Portugal going to catch-up, sandals and port wine……

    • Hi Paul C

      I guess the German car manufacturers are welcoming the new higher UK Pound £ (1.37+). I can’t remember any price cuts can you?

      I have however been following Portugal fairly closely which is how I know this bit. From Portugal Global.

      “Volkswagen AutoEuropa the flagship of the automotive sector in Portugal and also, consistently, one of the Top 5 best Volkswagen plants around the world. Manufacturing approximatly 100.000 cars per year, overseas customers – namely from Germany and the US – account for 98% of total production.

      Volkswagen AutoEuropa has, of course, great impact in the Portuguese economy delivering 2% of the total GDP, but the automotive sector in Portugal has 40 years of tradition, and goes beyond this example of excellence. With an annual turnover of around 4.8 billion euros, and delivering about 170.000 passenger cars, light and heavy commercial vehicles, per year, the auto sector – including car and component production – is a center pillar of the Portuguese economy. It represents 4% of the total GDP, mobilizes a workforce of about 40.000 people and is one of the main exporting Portuguese sectors.”

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