Germany to consolidate upturn in coming months - Bundesbank

Reuters

By Michelle Martin

BERLIN (Reuters) - Germany, Europe's largest economy, is growing solidly and its upturn will likely be consolidated in the coming months, helped by domestic demand and an improved global environment, the Bundesbank said on Monday.

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

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

While exports lack momentum and have dampened corporate investment, many parts of the domestic economy like residential construction and private consumption - helped by a robust labour market and strong wage increases - are growing, it said.

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

On a seasonally adjusted basis, imports should just about hold on to second-quarter levels between July and September, the Bundesbank said.

Foreign demand should provide industry with more tailwind in the coming months, raising expectations that demand will soon rise far above normal capacity utilisation again, potentially making firms more willing to invest.

While industrial investment was not on a clear path of recovery in the third quarter, firms are likely to increase investment 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, only around one in three wants to increase investment in machinery and equipment next year. One in six wants to cut such spending.

The Bundesbank warned against introducing a statutory minimum wage, saying it carried "significant risks to employment" with it.

The Social Democrats (SPD), with whom Chancellor Angela Merkel's conservatives are in coalition talks, are demanding a minimum wage of 8.50 euros per hour. The Bundesbank said this level was "too high", with one in six workers currently earning less than this.

FOREIGN DEMAND

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

Deliveries to China increased strongly during the summer months and though exports to the Asian country are likely to decline slightly this year, they will increase again in the coming years, the Bundesbank said.

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

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

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

One reason for slower growth is the Chinese government's attempts to make the transition to an economy fired by consumption rather than investment, the Bundesbank said.

That will weaken demand for German investment goods and shipments of consumer goods are unlikely to be able to offset this decline given that such products have hitherto made up only a small proportion of the goods Germany ships to China, it said.

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

(Reporting by Michelle Martin; Editing by Stephen Brown)

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