Germany to consolidate upturn in coming months-Bundesbank

Reuters

By Michelle Martin

BERLIN, Nov 18 (Reuters) - Germany, Europe's largesteconomy, is growing solidly and its upturn will likely beconsolidated in the coming months, helped by domestic demand andan improved global environment, the Bundesbank said on Monday.

The economy stagnated in the first quarter of 2013 andthough it achieved bumper growth of 0.7 percent in the secondquarter, preliminary data shows it expanded by just 0.3 percentbetween July and September as exports weighed.

"There's a good chance that the economic upturn in Germanywill be further cemented in the coming months," the central banksaid in its November monthly report.

While exports lack momentum and have dampened corporateinvestment, many parts of the domestic economy like residentialconstruction and private consumption - helped by a robust labourmarket and strong wage increases - are growing, it said.

Private consumption increased in the third quarter, albeitless strongly than in the second, as Germans were upbeat abouttheir income prospects, making them more willing to buy goods.

On a seasonally adjusted basis, imports should just abouthold on to second-quarter levels between July and September, theBundesbank said.

Foreign demand should provide industry with more tailwind inthe coming months, raising expectations that demand will soonrise far above normal capacity utilisation again, potentiallymaking firms more willing to invest.

While industrial investment was not on a clear path ofrecovery in the third quarter, firms are likely to increaseinvestment if the upward trend of demand is cemented, it said.

But a survey by the Cologne Institute for Economic Research(IW) showed that although firms expect a recovery in 2014, onlyaround one in three wants to increase investment in machineryand equipment next year. One in six wants to cut such spending.

The Bundesbank warned against introducing a statutoryminimum wage, saying it carried "significant risks toemployment" with it.

The Social Democrats (SPD), with whom Chancellor AngelaMerkel's conservatives are in coalition talks, are demanding aminimum wage of 8.50 euros per hour. The Bundesbank said thislevel was "too high", with one in six workers currently earningless than this.

FOREIGN DEMAND

The Bundesbank said the feeble euro zone recovery, moderategrowth in important industrial countries and a slowdown inemerging markets left shipments abroad without impetus.

Deliveries to China increased strongly during the summermonths and though exports to the Asian country are likely todecline slightly this year, they will increase again in thecoming years, the Bundesbank said.

"But it seems improbable that they'll reach the high rate ofexpansion seen in the past," the central bank warned.

As the euro zone crisis weakened demand close to home, manyGerman firms had looked to China as a strong alternative marketon which to offload their goods.

The Bundesbank said between 2009 and 2011 exports of Germangoods to China increased from around 37 billion euros ($50billion) to 65 billion euros but growth in 2012 almost came to astandstill.

One reason for slower growth is the Chinese government'sattempts to make the transition to an economy fired byconsumption rather than investment, the Bundesbank said.

That will weaken demand for German investment goods andshipments of consumer goods are unlikely to be able to offsetthis decline given that such products have hitherto made up onlya small proportion of the goods Germany ships to China, it said.

Vehicle exports to China would also grow more moderately infuture, though carmakers can get in on the increase in demandfor cars by manufacturing more in the country.

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